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China's markets rediscover appetite for risk

Traders are betting big; CSI 300 Index makes its biggest jump since August 2016 on Tuesday. But analysts recommend caution in light of the trade dispute with US in play

Hong Kong

CHINESE financial markets are rediscovering an appetite for risk not seen in months, taking cues from the government's biggest push yet to invigorate this year's slowing economy.

The CSI 300 Index of mainland stocks climbed 1.6 per cent on Tuesday, capping its biggest three-day gain since mid-August 2016, when economic indicators vindicated China's moves to stabilise a slowdown back then. While there's no guarantee of success this time, with the X-factor of a trade dispute with the US in play, traders are betting big.

The yuan tumbled on Tuesday to the weakest in more than a year against the dollar, a day after a record injection of funding to lenders by the People's Bank of China (PBOC). And benchmark 10-year government bond yields have bounced off their lowest since April last year.

The moves could portend an end to the bearish sentiment that's clouded China's markets for months. Investors have been fleeing equities and taking shelter in bonds, spooked by a deleveraging campaign that's contributed to a record run of corporate defaults and a slide in public investment. Prospects for US tariff hikes on an increasing swathe of Chinese exports haven't helped. It all added up to a US$2 trillion equity wipeout from January highs.

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Aidan Yao, a senior economist at AXA Investment Asia Ltd in Hong Kong, said: "It's a concrete sign of coordinated stimulus and addresses one of the key factors that's been weighing on Chinese markets. Fiscal and monetary authorities are providing the liquidity needed to support the economy. For markets, the past week has really mitigated domestic risks."

Among the steps by policy makers that are cheering traders: A State Council statement on Monday that said fiscal policy should be "more proactive". The PBOC's offer of 502 billion yuan (S$101 billion) of one-year loans to banks on Monday, the largest use of the medium-term lending facility since it started in 2014.

The central bank moved on Friday to soften the implementation of tighter regulation of wealth management products, which had fuelled the shadow-banking sector.

Guo Shuqing, the head of China's banking and insurance regulator, corralled executives from the nation's biggest banks on July 17 and urged them to take the lead on boosting loans, especially to small and micro enterprises.

Banking shares have been some of the biggest beneficiaries of the current rally, rising 6.5 per cent in three days for their best run in almost two years. Industrial companies - a group that would benefit from infrastructure projects - soared 3 per cent Tuesday, their biggest rally since May 2016. Materials shares also rallied.

It's all a big turnaround from just three weeks ago, when the CSI 300 hit a 14-month low. Not even expectations for the best earnings growth in eight years had been enough to draw buyers back in.

There are plenty of reasons for caution. Some analysts are saying China is unlikely to embrace the scale of stimulus of years past, with President Xi Jinping and his lieutenants having repeatedly expressed concerns about the dangers of leverage and a build-up of financial risks. The end-game of US President Donald Trump's moves to curtail Chinese companies' access to the world's biggest economy is also unknown.

Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA, said: "Even though stimulus will support the market and economy, it's not a game changer. China will continue to crack down on shadow banking, and that will still pressure banks' liquidity in the long term - it's just that the pace will be slower. This is not a turning point for a sustained advance in stocks and riskier bonds."

That probably won't stop equities from rallying on the next PBOC easing move, however. Economists widely expect further reductions in the required reserve ratio, unlocking liquidity in a financial system that's been constricted by steadily diminishing gains in money supply.

Recent measures "provide important reassurances to investors of proactive government policies to contain the downside growth risks and should continue to anchor sentiment," wrote United Overseas Bank Ltd economists Suan Teck Kin and Ho Woei Chen in a note to clients on Tuesday. BLOOMBERG

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