- Investors may have already priced-in rate move, Shenwan says
- Rate swaps drop most in two months, yuan is little changed
China’s stocks rose to a two-month high and bonds advanced after the central bank cut interest rates for a sixth time in a year as the nation’s leaders gather this week to map out a five-year plan for the world’s second-largest economy.
The Shanghai Composite Index increased 0.5 percent to 3,429.58 at the close, the highest level since Aug. 21. Technology companies led gains, with Wangsu Science & Technology Co. surging 3.5 percent. The 10-year bond yield dropped to the lowest level since 2009 and interest-rate swaps declined by the most in two months.
The Shanghai gauge has rebounded 17 percent from this year’s low on Aug. 26 as the government took measures to stabilize the stock market after a $5 trillion rout and policy makers introduced more measures to boost growth amid the slowest economic expansion in a quarter of a century. The People’s Bank of China on Friday announced a 25 basis-point cut in the benchmark lending rate, while reserve-requirement ratios for lenders were reduced by 50 basis points. The Communist Party meets for its fifth plenary session from Monday.
“These cuts are clearly welcomed by the stock market and likely to help the real economy,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co. in Shanghai. “The impact was perhaps not as large as it should have been as some investors already priced in a interest-rate cut before the end of the year.”
Hong Kong’s Hang Seng China Enterprises Index added 0.1 percent at the close, while the Hang Seng Index slipped 0.2 percent. The CSI 300 Index rose 0.5 percent. Trading volumes in Shanghai were 29 percent above the 30-day average.
China’s leaders have gone to unprecedented lengths to stem the market rout since June, including curbs on short selling and futures trading, while increasing targeted measures to support the real-estate and auto industries. Gross domestic product rose 6.9 percent in the three months through September from a year earlier, the slowest quarterly expansion since 2009.
The one-year lending rate will be cut to 4.35 percent from 4.60 percent effective Saturday the PBOC said on its website, while the one-year deposit rate will fall to 1.50 percent from 1.75 percent. The PBOC also scrapped a deposit-rate ceiling that limited the rate banks could pay savers. Removing such controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth and to bolster competition in banking.
A gauge of technology shares in the CSI 300 increased 1.1 percent for the steepest gain among 10 industry groups. Tsinghua Tongfang Co., a computer maker, advanced 10 percent. Financial shares also rose after the rate cut, led by brokerages. Haitong Securities Co. climbed 1.5 percent, while Huatai Securities Co. surged 3.1 percent.
"The rate cuts have injected funds in the markets and pushed the rates down," said Chen Ji, a Shanghai-based researcher specializing in monetary policy at Bank of Communications Co. "From now on, the PBOC will likely roll out more targeted easing measures to stimulate the economy."
The yield on sovereign bonds due July 2025 fell three basis points to 3.04 percent, the lowest level for a benchmark 10-year note since January 2009. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, sank nine basis points to 2.31 percent. The seven-day repo rate declined three basis points to 2.35 percent.
Goldman Sachs Group Inc. estimated the easing will release 600 billion yuan to 700 billion yuan ($94 billion to $110 billion) into the financial system, helping keep borrowing costs down at a time of record capital outflows. The U.S. bank predicts reserve-requirement ratios will be lowered by another 50 basis points by year-end, though policy makers will seek to prevent the yuan from weakening.
The yuan was little changed at 6.3508 per dollar in Shanghai, after weakening as much as 0.13 percent.
At the plenum, Chinese leaders are expected to announce a dismantling of currency controls, lower barriers for foreign non-bank financial firms, emphasize home-grown technologies and prioritize population growth. Officials are targeting GDP expansion of about 7 percent for 2015. President Xi Jinping’s blueprint for 2016-2020 will seek to map out the structural change needed to propel the next leg in the nation’s march toward high-income status.
The rebound in Chinese equities spurred by the government’s efforts to boost growth will probably fade as the measures underscore fundamental weakness in the economy, according to Barclays Plc, Blackfriars Asset Management Ltd. and BlackRock Inc.
“The market has already priced in the possibility of China stability and policy action,” Amer Bisat, managing director and portfolio manager for emerging markets at BlackRock, said by phone on Friday. “Policy actions are supportive, but you need the fundamental picture to improve.”
— With assistance by Tian Chen, and Kyoungwha Kim