SINGAPORE: Chinese stocks surged on Tuesday, the yuan jumped and bonds rallied briefly after Beijing announced a slate of stimulus measures including rate cuts and fresh funding for equity purchases, in a bid to prop up the ailing economy.
China’s CSI300 blue-chip index was last up 4%, while the Shanghai Composite Index gained 3.9%. Both were on track for their biggest one-day percentage gain in more than two years. Hong Kong’s main index jumped 3.9%.
In a morning press conference, People’s Bank of China (PBOC) Governor Pan Gongsheng said the central bank will cut banks’ reserve requirement ratio (RRR) by 50 basis points and the seven-day reverse repo rate by 0.2 percentage point to 1.5%, to support a recovery in prices.
That would in turn see the country’s medium-term lending facility (MLF) lowered by 0.3 percentage point. The loan prime rate (LPR) is also set to be reduced by about 0.2 to 0.25 percentage point, though Pan did not specify when the moves will take effect.
Chinese bonds rallied in an initial knee-jerk reaction to the larger-than-expected rate cuts, though pared gains over the course of the trading day as investors took profits.
The benchmark 10-year government bond yield bottomed at 2.036%, close to the record low hit last week, before trading roughly one basis point higher at 2.06%. Bond yields move inversely to prices.
Treasury futures on 30-year bonds for December delivery hit a record high early in the session and were last down 0.85%.
“The market reaction so far, I think is positive,” said Khoon Goh, head of Asia research at ANZ.
China stocks rise for 4th day amid stimulus hopes; Hang Seng hits 3-month high
“While there was some anticipation that stimulus measures would be announced after they mentioned there was going to be a press briefing, the package of measures so far, I would say, is probably larger than what market was expecting.” The yuan scaled a 16-month high in both the onshore and offshore markets as traders hoped the latest measures would help get China’s bumpy economic recovery back on track.
Shares of property companies in Hong Kong and China similarly saw strong gains, thanks to cuts to existing mortgage rates.
Many investors had anticipated rate cuts in China last Friday after the U.S. Federal Reserve kicked off its easing cycle with a hefty half percentage point rate cut last week.
The PBOC last cut its short- and long-term benchmark lending rates in July.
The world’s second-largest economy is battling deflationary pressures and struggling to lift growth despite a series of policy measures aimed at spurring domestic spending, with its beleaguered property sector also remaining a huge drag.
Faltering Chinese economic activity has prompted global brokerages to scale back their 2024 China growth forecasts to below the government’s official target of about 5%.
“Today’s move is still significant, as it signals a broader shift in policy stance as was the case in late 2020,” said Larry Hu, chief China economist at Macquarie.
“As such, it may be the beginning of the end of China’s longest deflationary streak since 1999.”
Fresh funds
Also on Tuesday, PBOC’s Pan said China will roll out two structural monetary policy tools for the first time to help stabilise the country’s capital market.
The first tool would allow qualified brokerages, fund companies and insurers to swap their bond and equity holdings with “highly safe and liquid” central bank assets – including treasury bonds and bills, boosting their ability to obtain money for stock investment, Pan said.
Plagued by outflows as investors continue to pull money out of China’s stock markets, the CSI 300 index has fallen more than 4% for the year thus far while the Shanghai Composite Index is down over 5%, with both indexes having tumbled to multi-year lows earlier this year.
Pan estimated the initial size of the swap programme at 500 billion yuan ($70.93 billion), though he signalled the potential for an expansion to as much as 150 trillion yuan in total.
Elsewhere, the onshore yuan strengthened to an intraday high of 7.0318 per dollar, its strongest level since May 2023.
Its offshore counterpart similarly gained roughly 0.4% to 7.0310 per dollar.
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