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China easing aims markets, not economy  Back
By: Karen Yeung and Samuel Shen
China's surprise easing of monetary policy may put a floor under the sagging stock market and support the shaky property sector, while pushing long-term bond yields down sharply.
Cuts in lending rates and bank reserve ratios, announced on Monday appear to be designed mainly to support Chinese asset prices principally equities, but also real estate rather than to stimulate the overall economy.
"This is mainly a signal for the stock market. The index is near 2,000 points, and that's a key level where authorities feel they need to come in and support the market," said Shi Lei, analyst at Bank of China in Beijing.
The central bank said on Monday that it was cutting the benchmark one-year lending rate by 27 basis points and lowering reserve requirements by one percentage point for all but the five biggest banks and the Postal Savings Bank.
This breaking a two-year cycle of monetary tightening came much earlier than financial markets had anticipated. Most traders had expected monetary easing near the end of this year.
Although the central bank said that it was acting to "maintain the stable, fast and continuous development of the national economy", analysts said the macroeconomic picture did not appear to require an early easing.
The economy seems to suffer a slump but exports and retail sales continued to grow strongly in August. Economists generally expect gross domestic product growth to stay above 8 per cent next year, after 10.4 per cent in the first half of this year.
The central bank, which said last month it was determined to prevent large-scale capital outflows, may have chosen to act on Monday because it was worried that Lehman Brothers' filing for bankruptcy protection could prompt the stock market to plunge when it reopens on Tuesday after a national holiday.
NO LOOSENING TREND
"This is unlikely to be the start of a loosening trend. I don't see another rate cut this year, since authorities are still concerned by inflation," said Shi. "They are still waiting to see whether economic growth is slowing too sharply."
If authorities had been anxious to boost economic growth, they would have cut bank deposit rates as well as lending rates, and would also have lowered reserve requirements for the biggest banks, Shi and others said.
Instead, authorities appear to be trying to avert a further slide in asset prices that could do long-term damage to the stock and property markets and prompt net capital outflows from China, of the kind which other emerging markets have seen this year.
The Shanghai Composite Index hit a 21-month closing with lows of 2,078 points last week, down by 66 per cent from last October's peak. Property prices and transactions have shrunk dramatically in some major cities in last several months.
The monetary easing "means 2,000 points will be a relatively firm floor for the stock index, at least in the medium term, since valuations at this point are already attractive," said Gao Lingzhi, strategist at Great Wall Securities in Shenzhen.
Analysts said shares in debt-heavy companies such as property developers could rise across the board on Tuesday, though banks could weaken because their interest rate margins would be hurt by the combination of lower lending rates and steady deposit rates.
BOND YIELDS
In the money market, traders said longer-term bond yields could fall between 10 and 20 basis points on Tuesday, with the yield curve flattening.
"This is quiet positive for the bond market because it didn't expect a rate cut so soon," said a trader at a securities company in Shanghai.
But he said short-term bill yields were unlikely to fall much, and bond repurchase rates would probably stay steady, because the central bank had not cut reserve ratios for the big banks which dominate the market. This signaled that it does not want an overall easing of liquidity, they said. "Deposit rates were not cut, and that means funding costs are still high for commercial banks," the brokerage trader said.
In the foreign exchange market, where the yuan closed at 6.8450 against the dollar on Friday, traders expect the central bank to keep currency rates stable this week, as it often does after monetary policy changes to deter speculation.
The central bank's use of its daily mid-point system and indirect intervention over the past month has suggested that it no longer wants rapid yuan appreciation because of the slowing economy, but is also keen to prevent depreciation since that could prompt capital outflows.
"The yuan is likely to move very little tomorrow. Stability will be the key word for the rest of this year," said a senior foreign exchange dealer at a big European bank in Shanghai. (With additional reporting by Lu Jianxin) (Writing by Andrew Torchia; editing by David Stamp)
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