China: Stocks fall as central bank easing fails to impress, more stimulus expected

[SHANGHAI] Chinese stocks erased earlier gains and closed one per cent lower on Thursday, after an injection of more money into the system by the central bank failed to impress investors who are worried about an ongoing crackdown on high-leverage trading.

The yuan and money rates dipped after the People's Bank of China (PBOC) cut banks' reserve requirement ratios by 50 basis points, a widely expected stimulus move to support the world's second-biggest economy.

"The cut was largely priced in to the stock market (already), but it has reconfirmed an important message to investors that China's monetary cycle has firmly shifted to the loosening camp," Jing Ning, Portfolio Manager at Fidelity Worldwide Investment, wrote in a note to clients.

"The next question is whether this is followed by a rate cut by the PBOC. We will not see the impact of last November's rate decision on the economy until the end of this quarter."

Weighed down by a cooling property market, industrial overcapacity and slowing investment, China's economy grew at its slowest pace in 24 years in 2014 and is expected to cool further to around 7 per cent this year, even with additional stimulus.

China's factory sector unexpectedly shrank for the first time in nearly 2-1/2 years in January and firms see more gloom ahead, an official survey showed on Sunday, raising expectations that policymakers will have to take more action to forestall a sharper slowdown.

In Shanghai, the CSI300 index closed down one per cent after surging 2.5 per cent at the open, while the Shanghai Composite Index ended down 1.2 per cent after opening up 2.4 per cent.

Blue chips fell across the board, but the NASDAQ-like ChiNext composite ended up 0.9 per cent.

"Small and mid-caps were less impacted by margin trading investigations that were targeted at blue chips and we're seeing that reflected in the way various sectors of the market are performing today," said Li Zheming, an analyst at Datong Securities in Dalian. "If these easing policies continue, we may see a more positive reaction from the market than we did today."

Shares have been under pressure since last week on news that the stock regulator is probing the margin trading business in the latest efforts to rein in speculation in the market which has gained around 40 per cent over the past few months.

In the currency market, the yuan opened at 6.2560 per dollar and was at 6.2516 in late afternoon trade, 44 pips away from the previous close.

As the economy cools, money has been flowing out of China, putting downward pressure on the currency and prompting large state-owned banks to step in to sell dollars to ensure the yuan's weakness doesn't trigger even larger outflows.

Analysts at ANZ believe the RRR cut will inject about 600 billion yuan (US$95.96 billion) into the banking system, though questions remain over whether the money will fund real economic activity or be channeled into speculation like bigger bets on the stock market.

"We maintain our view that the authorities will not depreciate the currency, as that would risk even more capital outflows, which could prove to be destabilising," ANZ strategists wrote in a daily note.

Money market rates edged down slightly, with the weighted average of the benchmark seven-day bond repurchase agreement was 4.41 per cent, down a moderate 13 basis points from Wednesday.

Economists generally expect the central bank to cut reserve ratios one or two more times this year and lower interest rates again, in addition to pumping more funds into the system as it struggles to bring down persistently high funding costs which are putting further strains on debt-laden Chinese companies.

REUTERS