Stocks dive, despite central bank boosting liquidity

Shanghai stocks registered their biggest daily loss in three and a half months yesterday, as China's bourses fell heavily despite a move by the central bank over the weekend to reduce the reserve ratio for most lenders.

Analysts say the move was not enough to calm nervousness over the US trade war.

The Shanghai Composite Index plunged 3.72 percent to close 104.84 points down at 2,716.51. The smaller Shenzhen Component Index fell 4.05 percent to 8,060.83 points and the Nasdaq-style ChiNext enterprise board lost 4.09 percent to close at 1353.67 points.

The A-share market opened lower on the first trading day post the National Day Holiday and showed no signs of rebounding — with more than 3,000 stocks falling heavily.

Despite the central bank move, analysts said trade tensions with the US continue to weigh on the markets.

“An RRR (reserve requirement ratio) cut is not enough to counter the impact of the trade war. The economy is quite weak, and I see a growing number of companies selling their assets,” said David Dai, general manager of Shanghai Wisdom Investment Co Ltd, a hedge fund.

Market heavyweights were mainly negative. Liquor makers, insurance companies and car makers were among the worst-performers. Shares of the SAIC Motor Corporation Limited, the largest auto company on China's A-share market, slipped by the daily limit of 10 percent to close at 30.01 yuan (US$4.35).

The People’s Bank of China, China’s central bank, announced on Sunday that it would cut the amount of cash that most banks must hold as reserves from October 15 to lower the financing cost for the country’s real economy.

Reserve requirement ratios — 15.5 percent for large commercial lenders and 13.5 percent for smaller banks — will fall by 100 basis points, matching a similar-sized move in April.

Economists predicted further cuts ahead.

Beijing has stepped up liquidity support across the financial system this year as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that a heated trade war with the United States could deal a damaging blow to the broader economy.

Sunday’s move will inject a net 750 billion yuan (US$109.2 billion) in cash into the banking system by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing medium-term lending facility loans.

The PBOC's latest move is designed at engineering a "credit impulse" to increase liquidity in China’s economy, according to Raymond Yeung and Betty Wang, economists at ANZ Research.

Shenwan Hongyuan Securities said that the market will not have too much downward pressure in the fourth quarter and there has already basis for the market’s gradual return to stabilization.

The central bank said on Sunday it would continue to take necessary measures to stabilize market expectations, while maintaining a prudent and neutral monetary policy.

The PBOC would “maintain reasonably ample liquidity to drive the reasonable growth of monetary credit and social financing scale,” it said.

The RRR cut would not create depreciation pressure on the yuan, the PBOC said, adding it would keep the foreign exchange markets stable.