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Wednesday, 26 August 2015

China stocks end morning higher but rate cuts don't dispel fears

Investors look at an electronic board showing stock information at a brokerage house in Shanghai, China, August 26, 2015. REUTERS/Aly Song

China stocks ended higher on Wednesday morning after wild swings in early trade as investors hoped fresh interest rate cuts by the central bank would stabilize the economy and stop a stock market rout that has seen prices fall 20 percent in four days.

But the market was generally unimpressed with China's strong monetary easing measures announced on Tuesday night, believing much more official support is needed, and traders said shares remained vulnerable to another selloff.

Blue chips reversed early losses, but small-caps continued to slide, with some traders attributing the volatility to margin calls and mutual fund redemptions.

After opening 0.7 percent at open, the blue-chip CSI300 index .CSI300 fell as much as 3 percent but managed to end the morning up 1.7 percent at 3,094.03 points.

The Shanghai Composite Index .SSEC also reversed early losses of nearly 4 percent, rising 0.8 percent to 2,988.76 points by the lunch break.

Stock index futures CIFc1, which slumped 10 percent for two days in a row, rose sharply by midday, after regulators restricted trading in the instruments in the latest effort to crack down on speculation.

The People's Bank of China cut interest rates and lowered the amount of reserves banks must hold for the second time in two months, in an apparent move to aid the economy and the slumping stock market.

"As I look at the screen – a few greens, a few reds. In short, the market was not impressed," wrote DBS Chief Investment Officer Lim Say Boon.

"You can't stimulate consumption via interest rate cuts. At least not in Asia anyway ... Also, you don’t stimulate net exports through interest rates."

The monetary easing nevertheless propped up shares in banking .CSI300BI and real estate .CSI300REI stocks, sectors that investors believe will benefit the most from additional liquidity.

Major carmakers, including BYD 002594.SZ, Dongfeng Auto (600006.SS) and Changan Auto 000625.SZ also rose sharply as investors bet the central bank's supportive policies toward auto financing and leasing firms would aid car sales.

But small-caps remained under selling pressure, with Shenzhen's start-up board ChiNext .CHINEXTC down 1 percent, and the CSI500 index .CSI500 tracking small listed companies declining 0.5 percent.

"The previous days' slumps have triggered margin calls and forced liquidation in some stocks, which is why you see some investors dumping shares at whatever prices they can sell,” said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.

He added that some blue-chips are relatively cheap now and have attracted bargain hunters.

Improved sentiment in mainland and regional markets aided Hong Kong stocks.

The Hang Seng index .HSI added 0.2 percent, to 21,443.80 points, while the Hong Kong China Enterprises Index .HSCE gained 1.3 percent, to 9,638.14.

All main industry indexes, except for services .HSCIS, rose in the city.

Reference: Reuters

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