After watching share prices tumble around 25% in a little more than a week, the People’s Bank of China re-entered the fray late on Tuesday, cutting interest rates and further loosening bank lending restrictions.
The response from China’s two main stock indexes, never reliable barometers of the domestic economy, was typically erratic, lurching between gains and losses of over 3% before closing modestly lower.
European markets had risen sharply immediately after the People’s Bank move on Tuesday, but US indexes turned negative after an initial leap, setting the tone for a lacklustre session in Asia yesterday.
“The whole market sentiment is still risk-off, which is why markets have taken the latest move from Beijing in their stride and believe more is needed to restore investor sentiment,” said Grace Tam, global markets strategist at JP Morgan Asset Management in Hong Kong.
The CSI300 index of the biggest listed companies in Shanghai and Shenzhen closed down 0.6%, while the Shanghai Composite Index fell 1.3%.
Investors’ caution was understandable, said Lim Say Boon, chief investment officer at DBS Bank, as the policy moves would have little impact on consumption in a nation of savers, or investment in a country where government, not the private sector, takes the lead.
“What the market is waiting for (is) the ‘big bazooka’ of government spending,” he wrote in a note.
There was also concern that the PBOC was simply playing catch-up. ANZ Bank noted that, even after four interest rate cuts since November, the negative producer price index was keeping real borrowing costs elevated.
“With the PPI at minus 5.4%, year-on-year, in July, the real interest rate costs could be well above 10%.
“We believe that the traditional monetary policy easing, such as cutting RRR (reserve requirement ratio) and lowering the interest rate, is not sufficient to mitigate the risks associated with China’s highly leveraged economy,” it added.
Concerns about China’s economy intensified after factory activity shrank at its fastest pace in almost six and a half years and the central bank unexpectedly devalued its yuan currency earlier this month.
confidence among Chinese consumers rose for the third consecutive month in August, according to a Westpac MNI survey, as household finances continued to improve.
OCBC Bank noted cuts in the RRR were needed to ease the liquidity pressures created by capital outflows exacerbated by the yuan devaluation. It said it expected at least another 100 basis point cut this year.