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[SHANGHAI] China's major financial markets, including stocks, bonds and currency, adjusted cautiously to Friday evening's policy easing, but trading volumes were subdued, indicating some wariness over uncertain economic fundamentals.
The PBOC late on Friday said it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.35 per cent, effective Oct. 24.
The one-year benchmark deposit rate was lowered by 25 basis points to 1.50 per cent, and the bank also removed the ceiling on deposit rates, seen as enabling more competition between Chinese banks and also giving higher returns to savers, part of supporting consumption and reducing sloppy investment.
The reserve requirement ratio (RRR) was also cut by 50 basis points for all banks, taking the ratio to 17.5 per cent for the biggest lenders, adding around 700 billion yuan (S$154 billion)to the money supply, according to analyst estimates.
China's major stock indexes were up less than one per cent at the end of the morning session, led by financials, in particular brokerages and smaller banks. Futures markets rose, although volumes remained moribund - most major contracts were priced at discounts to current index values.
The CSI300 index rose 0.8 per cent to 3,599.30 points, while the Shanghai Composite Index gained 0.7 per cent to 3,437.03 points. The Hang Seng index added 0.2 per cent, to 23,204.33 points, while the China Enterprises Index gained 0.5 per cent, to 10,794.35.
"The market was slightly buoyed by the central bank's rate cut. Medium and small companies, and securities companies were relatively dynamic," Said Zhang Qi, an analyst at Haitong Securities in Shanghai. "But the market appeared to be in correction after it rose a lot in October, and some investors sold stocks on the short-lived rise from the rate cuts. So overall, the market stayed stable today." However, CSI300 trading volumes during the morning session were extremely low, and the same held true for the currency market, which was largely flat, despite a sharp plunge in the dollar index over the weekend. Trading remained close to the official midpoint setting with mild volatility, while the offshore yuan continued to price in a discount to the onshore rate.
The spot market opened at 6.3550 per dollar and was changing hands at 6.3528 at midday, 28 pips away from the previous close and -0.03 per cent away from the midpoint. The offshore yuan was trading 0.62 per cent weaker than the onshore spot at 6.3925 per dollar.
"There were no signs of PBOC intervention in the first 30 minutes of trading," said a trader at a major European bank in Shanghai. "Still, the onshore yuan is now much stronger than the offshore spot, so pressure for the onshore market to weaken exists. Traders are watching whether the yuan will weaken and if so, possible central bank reaction." The central bank has had a tense relationship with the foreign exchange market in recent months, intervening repeatedly both onshore and off to keep the yuan stable and by extension discourage capital flight, even as it positions the currency for potential inclusion in the International Monetary Fund's currency basket.
Holding the currency up has caused China to drain its foreign exchange reserves to buy yuan, potentially impacting onshore money market liquidity. However, cutting reserve requirement ratios - and maintaining trade surpluses - helps offset the impact.
As a result, benchmark money rates eased slightly without any major adjustments to the curve, and liquidity remained healthy, traders said.
The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.3399 per cent, down 4.34 basis points from the previous day's closing average rate.
The the Shanghai Interbank Offered Rate (SHIBOR) for the same tenor fell to 2.3380 per cent, 6.30 basis points down from the previous close. "Money was already pretty loose last week before the rate cut, so I don't actually understand why they needed to do this rate cut now," said a money trader at municipal bank in Shanghai, adding that she suspected the decision had more to do with supporting consumer prices and other macroeconomic issues.