Strategy Bulletin  

20/04/2015

China's new regulations and monetary easing

Welche Auswirkungen haben die jüngsten regulatorischen Entscheidungen Chinas auf die chinesischen Finanzmärkte?

Over the weekend, China implemented two seemingly contradictory measures in regard to its financial markets. After the market close on Friday, the China Securities Regulatory Commission (CSRC) banned brokers’ margin-trading business from using umbrella trusts and also encouraged short-selling businesses by expanding the list of securities eligible for short selling (from 900 to 1,100 shares).

Then on Sunday, the People’s Bank of China (PBoC) announced 100 basis points cut in the banking sector’s reserve requirement ratios (RRR), effectively releasing 1.2 trillion yuan of liquidity into the system for new lending. The extent of the RRR cut was much larger than what the market consensus anticipated for the decision.

Here are our main takeaways.

  • Authorities still keen to avoid extreme market dislocation: The surprise announcement of the PBoC’s policy easing after the CSRC’s move clearly shows that authorities in Beijing prefer to control the pace of the remarkable rally in A-shares (up by roughly 100% over last 12 months) while avoiding abrupt market dislocation that could complicate their (more important) growth stabilization efforts. The jury is out on whether or not they can succeed in this endeavor, but the sequencing of events clearly dilutes the hawkish implication of Friday’s measures. As a matter of fact, a CSRC official spoke on Saturday to ease markets’ reaction by stating that the new rules were targeted to promote more balanced development of the country’s markets and not intended to depress the markets.
  • H-shares even more attractive for Chinese investors in light of new regulation: The new margin trading regulation only affects onshore markets (A-shares) whereas the regulatory structure for Hong Kong listed shares (H-shares) has not changed. Not only do H-shares trade at roughly 30% discount to A-shares of the same corporate entity (according to A-H premium index), but also they still offer margin trading opportunities. It is highly likely that the positive impact of additional policy easing in China will be seen more visibly in H-shares in coming months as a result of these advantages. Consequently, we still firmly expect H-share discount to narrow in the future.
  • Monetary easing to underpin risk assets’ performance: The PBoC reserve requirement cut (minimum of 100 basis points, more for smaller banks / banks meeting policy thresholds for lending to small firms and the agricultural sector) was larger than the usual increment seen in the past and signals the bank’s more aggressively dovish stance in response to the ongoing slowdown in the economy. The first quarter growth in China (7% year on year) would have been alarmingly lower than the government’s target without the large positive contribution from the financial services industry (new account openings and fees from market turnover), and more policy support is required to stabilize real sector activities. The upshot is that the cut of 100 basis points is still insufficient to get the job done. We see additional RRR cuts being implemented over the course of the year, in the tune of 100 basis points (or even more) and possibly alongside further cuts in benchmark interest rates and short-term liquidity injections.

The market rally seen in last few months certainly has some irrational aspects. More aggressive policy shift to growth supportive measures, however, will continue to underpin risk appetite.

Homin Lee, Asia Economist

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