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On Monday, Chinese stocks closed lower despite the action by the PBOC to reduce banks’ reserve requirements (RRR/CRR cut) by 0.50% to 15.50% from 16.00%. However, the offshore yuan sank to a 5-3/4 month low of 6.5433 against the dollar on the PBOC's action.
Although China cuts RRR by a huge 0.50% on Sunday to support the slump in China market, this may cause more weak Yuan and such Yuan devaluation towards 7.00 from the present level of 6.50 would be negative for the global risk-on trade. Following the RRR cut, the onshore Yuan dropped to its lowest since early January while the offshore CNH tumbled to levels last seen in 2017, as the Shanghai composite failed to rebound on China's easing and dropped more than 1%.
Despite the latest major liquidity injection, China market failed to respond positively because not only was the RRR cut telegraphed well in advance, it reflects officials’ concern and panic over the economy, leverage and trade outlook. The PBOC is to cut the re-lending rate for SME loans by 0.50%, while the PBOC skipped open market operations for a daily net drain of CNY 10B and set CNY mid-point at 6.4893.
China’s stocks and currency fell after Sunday's announcement the PBOC would cut China's RRR, freeing up more than $100 billion in the banking system to help cushion a slowing economy, a move that was well anticipated. But it has been seen as insufficient to offset the potential economic slowdown that may be inflicted on China as Trump escalates protectionist measures.
The cut in the RRR by the PBOC doesn’t signal a shift in monetary policies, given the specific purpose of how the released capital will be used. It shouldn’t be interpreted as a one-way and all-out loosening of liquidity. Thus the market does not expect a significant change in the current funding costs, given the current policies and RRR cuts aimed at providing liquidity, but not at lowering financing costs. The Chinese government continues to focus on deleveraging in order to push through structural reforms and other monetary policies such as debt-to-equity swaps.
Hong-Kong is also in stress:
Elsewhere, the Hang Seng was among the laggards as money market rates in Hong Kong (HIBOR) printed fresh decade highs, while Shanghai Comp was choppy as support from the PBOC’s policy efforts tussled with renewed trade concerns. Chinese Property developer shares were among the worst performers in Hong Kong, as China’s planned RRR cut isn’t seen boosting the housing market, but rather channel funding to debt-equity swaps and SMEs; unlikely to benefit developers or homebuyers looking for mortgages.
As a result, Hang Seng Property Index dropped as much as 1.5% to two-month low, dragging the overall market, while airlines stocks were in stress on higher oil and Yuan slump and insurers were in pressure along with developers and casino operators.
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