China's Stocks Rebound in Late Trading After Reserve Ratio Cut

  • Central bank lowers reserve ratio first time in four months
  • Data shows China's manufacturing hasn't been weaker since 2009

What China's Manufacturing Report Says About the Economy

Chinese stocks rallied in late trading as the central bank cut the amount of cash lenders must hold in reserve and a strengthening yuan overshadowed disappointing manufacturing data.

The Shanghai Composite Index capped its biggest advance in a week, with most of the gains coming in the last hour of trading. The required reserve ratio will drop by 0.5 percentage point effective March 1, the People’s Bank of China said after the nation’s markets closed Monday. The manufacturing purchasing managers index contracted more than estimated and matched the lowest level in seven years, according to the statistics bureau. The yuan rose for the first time in eight days after the monetary authority raised the fixing.

“There’s no clear reason for the market surge in the late afternoon but expectations of more stimulus may have popped up, given the worse-than-expected PMI,” said Mari Oshidari, a Tokyo-based senior strategist at Okasan Securities Group Inc. “Investors are becoming cautious about being too bearish as they expect the government to try and avoid any market plunge before” the National People’s Congress starts later this week, she said.

The central bank move came after the Shanghai benchmark index tumbled as much as 4.6 percent on Monday amid disappointment over a lack of specific measures to boost growth during the Group of 20 meetings in the city. The gauge has dropped 23 percent this year, the worst performance among 93 global equity indexes, on concern capital outflows will accelerate and earnings deteriorate as the economic slowdown deepens.

Overly Panicky

The Shanghai stock gauge rose 1.7 percent to 2,733.17 at the close, after dropping 2.9 percent on Monday. All 10 industry groups on the CSI 300 Index advanced, led by materials and technology companies. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong added 1.9 percent, while the Hang Seng Index increased 1.6 percent.

The worst is over for Chinese stocks, according to Franklin Templeton’s money-management unit in Shanghai. The $5.1 trillion market will rebound as much as 20 percent in the “short term” as economic growth picks up and yuan volatility decreases, said Lirong Xu, the chief investment officer at Franklin Templeton Sealand Fund Management Co., which oversees about 30 billion yuan ($4.6 billion).

“People are overly panicky," Xu said in an interview in Hong Kong. “I am still quite bullish on the Chinese economy and the A-share markets on a one- to three-year horizon. The economy will bottom out in the first half and the yuan will stabilize."

More Cuts

The central bank said it lowered the reserve ratio to guide stable and appropriate growth in credit and create appropriate monetary and financial conditions for supply-side structural reform, according to a statement on its website late Monday. It has also been trying to restore stability to the nation’s currency after outflows hit a record pace in recent months, restraining its capacity to lower benchmark interest rates.

“The cut in the reserve requirement would help halt a sharp decline in stocks for now,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “We’ll see probably two or three more cuts in the reserve requirement this year as the government is still armed with more policy tools.”

Investors will remain risk-off this year regardless of the cut in reserve ratios, Credit Suisse Group AG analyst Chen Li wrote in a note, while Goldman Sachs Group Inc. analyst Kinger Lau said the move will only provide a short-term sentiment boost, with the outlook for China’s stocks remaining “challenging.”

Manufacturing Data

The factory gauge dropped to 49 in February, missing the median estimate of 49.4 in a Bloomberg survey of economists. Numbers below 50 indicate conditions worsened. In a sign China’s slowdown is spreading, the non-manufacturing PMI -- which has been outperforming the factory measure -- fell to the lowest level since December 2008.

Margin traders continued to cut bullish positions on Monday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to 501 billion yuan, the lowest level since November 2014.

The National People’s Congress will likely endorse plans to strengthen domestic capital markets and clean-up state banks, according to Bloomberg Intelligence analysts. The strategy is intended to stem capital outflows, diversify China’s financial system and eliminate bad debt, they said. The NPC begins March 5.

The Chinese currency climbed 0.2 percent to 6.5416 a dollar in Shanghai after the PBOC raised its reference rate by 0.1 percent to 6.5385. China’s officials said there is no intention or need to devalue the yuan, according to U.S. Treasury Secretary Jacob J Lew, who was speaking at a briefing in Hong Kong after Monday meetings with Premier Li Keqiang in Beijing.

Gold producers rallied. Zhongjin Gold Corp. gained 7.3 percent and Shandong Gold Mining Co. advanced 6.7 percent. The precious metal climbed 11 percent in February, the biggest monthly increase since January 2012.

Citic Securities Co. added 7.4 percent in Shanghai after its largest shareholder increased holdings. China Life Insurance Co. slipped 0.7 percent in Hong Kong. Its plan to buy a stake in Guangfa Bank for 23.3 billion yuan has raised investor concerns about the insurer’s rising exposure to the banking sector faced with rising bad loans.

— With assistance by Shidong Zhang, and Kana Nishizawa

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