China Index Futures Gain on PBOC Reserve Ratio Cut; ETFs Decline

  • Move seen providing short-term reassurance to investors
  • Commerzbank forecasts up to 150 basis points of further cuts

China Cuts Reserve Ratio in Latest Economic Boost

Chinese stock-index futures in Hong Kong climbed after the central bank cut the amount of cash the nation’s lenders must hold as reserves, boosting efforts to support the world’s second-largest economy.

The Hang Seng China Enterprises Index futures rose 1.2 percent as of 10:15 a.m. in New York. The yuan was little changed against the dollar in offshore trading after sliding as much as 0.2 percent. China’s one-year non-deliverable interest-rate swaps declined less than 1 basis point, to 2.21 percent, data compiled by Bloomberg show. Exchange-traded funds tracking A shares fell in the U.S. following losses in mainland markets during regular trading hours.

The move came after the Shanghai Composite Index sank to the lowest level since 2014, with Reorient Financial Markets Ltd. saying that investors were disappointed by a lack of specific measures to boost growth during the Group of 20 meeting in Shanghai last week. Policy makers are trying to walk a fine line between boosting growth and preventing capital outflows that have spurred bets on yuan depreciation.

“This shows the PBOC still has room to stimulate markets and the economy if necessary,” said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. “One message they want to send is that they have more tools than most other central banks. It’s a positive move and gives reassurance to the investor, at least in the short term.”

The reserve-requirement ratio for banks will drop by 0.5 percentage point effective March 1, the People’s Bank of China said on its website after local markets closed on Monday. The goal is to guide stable and appropriate growth in credit and create appropriate monetary and financial conditions for supply-side structural reform, it added.

PBOC Governor Zhou Xiaochuan highlighted the scope for further action if needed when he spoke ahead of the G-20 meeting. His co-host, Finance Minister Lou Jiwei, said China will expand its fiscal deficit to support structural reforms to the economy, which slowed to a 6.9 percent growth pace last year, the weakest since 1990.

“Initially the market thought the PBOC would hold on taking this action but, given the stock market performance today, I guess they thought it necessary to move today,” said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia.

The latest easing comes after the PBOC earlier this month lowered interest rates for loans granted to commercial banks via the Medium-term Lending Facility. The six-month and one-year borrowing costs were cut to 2.85 percent and 3 percent, respectively, from 3 percent and 3.25 percent in the latest operation on Feb. 19.

Yuan Trading

The offshore yuan fell as much as 0.20 percent in Hong Kong to 6.5518 a dollar. The onshore currency retreated 0.2 percent to 6.5520, extending its losses to a seventh day, the longest run of declines since December. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF fell 2.2 percent to $21.82, the lowest in two weeks, while the Market Vectors ChinaAMC A-Share ETF slipped 1.9 percent to $34.09.

“Another 100-150 basis point cut to the RRR can be expected this year,” Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note. “The side effect is on the onshore yuan exchange rate. We still see a weakening bias in the onshore yuan in the foreseeable future, Asian currencies would be under pressure to depreciate as well.”

— With assistance by Saijel Kishan, and Helen Sun

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