China Bails Out Flagging Stock Market As Bonds Stage Enormous Rally After RRR Cut

China Bails Out Flagging Stock Market As Bonds Stage Enormous Rally After RRR Cut

Wednesday’s rally is an important signal that the national team may have entered the market. The national team is likely to defend the Shanghai Composite at 3,000. They need to hit the brake to prevent the selloff from accelerating.

That’s from Central China Securities’ Zhang Gang, a Shanghai-based strategist who spoke to Bloomberg today for a piece on Chinese equities, which rallied on the session following the PBoC’s Tuesday RRR cut.


The Shanghai Composite rose on Wednesday thanks to a late surge and it’s a good thing, because mainland shares had fallen for five consecutive sessions:


As noted, Wednesday’s 0.8% gain came after the index was down early, a hallmark of state support:


As Bloomberg goes on to observe, “large-cap banks and oil companies,” led the charge and some of those names are favorites of the country’s fabled “national team” which stepped in to prop up the market during the summer 2015 implosion that saw legions of day trading housewives wiped out as a half dozen backdoor margin lending channels unwound in a harrowing bout of madness that ultimately forced Beijing to halt three quarters of the market.

Between Wednesday’s (probably) state buying and the RRR cut, it would appear that the Party is indeed attempting to manage the situation to avoid a market meltdown at a time when growth is decelerating (albeit still holding up according to the “official” numbers) and as a trade war with the Trump administration clouds the outlook.

It’s generally accepted that the move to squeeze leverage out of the shadow banking system and de-risk the financial system will likely entail some collateral damage (get it?) and two concerns for Beijing are loans to the real economy and financial assets. The RRR cut is designed to deal with both of those.

Yields on Chinese bonds plunged on Wednesday following the cut. 10Y yields were lower by some 16bps (the most since December 2016), yields on five-year sovereign notes fell 21bps, bringing the 12-day drop to 51bps, and the yield on one-year debt dove 16bps to 3.02%.


So clearly, the RRR cut is bullish bonds and it looks like stocks are going to get the state bid for the time being. On that note, we’ll leave you with some commentary from Goldman on the PBoC’s Tuesday move:

This is clearly a dovish move. The central bank has been avoiding using RRR and benchmark rate changes as both are widely viewed as tools with strong signaling effects. A RRR cut does not necessarily lead to lower interbank rates as the central bank might use other tools to make any changes rate neutral. However, it is likely that the interbank rate will be relatively lower because the RRR reflects a mild loosening bias. The cut is likely related to (1) slower than expected money and credit growth in March which raised concerns about demand growth sustainability. We expect April money and credit growth to show a rebound as the central bank may use quantitative tools to make sure money and credit growth does not decelerate meaningfully further, (2) rising risks of trade tensions, especially in light of ZTE sanctions and recent retaliation on sorghum, and (3) lower than expected inflation which lowered the perceived need to tighten policy, (4) lower than expected March data on exports, IP and FAI may also have contributed.


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