China cuts rates again to support economy

29 Jun 2015 | Author: | No comments yet »

China shares sink more than 3%.

After the benchmark Shanghai Composite Index opened as much as 3 per cent higher, it fluctuated wildly before dropping as much as 3.8 per cent at the end of the morning’s trading session.In its latest bid to shore up the slowing economy, the People’s Bank of China (PBOC) said on Saturday it was cutting both official interest rates and reducing required reverse ratio (RRR) for some banks that meet certain requirements. “But if the circle of monetary policy easing continues, the yuan would be under downward pressure in the longer term,” said a traders at a European bank in Shanghai.

Today, the Composite Index dipped even lower, below 4,099 (May 8 close), “a critical level” below which “effectively signals larger decline possibility,” said technical analyst Sunil Garg at J.P. Traders said they had expected authorities to keep the yuan steady this week as Beijing held the founding members’ meeting of the 57 countries to sign an agreement on the China-backed Asian Infrastructure Investment Bank (AIIB). In addition to the interest rates cuts, the PBoC has also reduced the amount of cash banks must keep in reserve three times, as well as using other measures to inject liquidity into the market. HSBC this morning estimates that China’s stock investors that borrow on margin will close another 300 billion yuan of leverage positions in the near future, while Deutsche Bank says Beijing will want to clamp down on margin financing to control systemic risk. UBS estimates that once stocks bought on margin have fallen by a cumulative 30%, margin investors will begin to face liquidation pressure on their entire accounts.

In the last two weeks, the Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR) dipped 22.1%, the Market Vectors ChinaAMC SME ChiNext ETF (CNXT) fell 22.8%, the iShares China Large-Cap ETF (FXI) and the iShares MSCI China ETF (MCHI) dropped 5.4% and 4.4% respectively.

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