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China Sends Message To Yuan Bears, Sparks Stock Rally With Stimulus Nod

A double dose of market-friendly news, as stimulus bets, yuan defense bolster sentiment.

Volume was relatively thin on the SHCOMP, so nobody is going to argue that Tuesday’s move marks a convincing turning point, but after recent stumbles, mainland investors will take it however it comes.

Chinese shares had their best day in a month thanks at least in part to an announcement from the Finance Ministry, which loosened the rules around how local governments can spend the proceeds from special bond sales. Long story short, the decision is designed to bolster infrastructure spending. The CSI 300 jumped more than 3% on the day.

The ChiNext, which last week became the first major mainland gauge to fall into a bear market amid renewed trade tensions, surged nearly 4%.

To be clear, this isn’t trivial. Citi called it “a significant policy shift” that should augment the boost to the economy from tax cuts announced earlier this year.

“[This] allows local government special bonds to be used as equity for infrastructure projects that meet certain requirements [where] previously, proceeds from a local government bond could only be used as ‘debt’ for an infrastructure project”, Goldman wrote Tuesday. “We believe these new measures could make it easier for projects to meet the requirement of the minimum capital ratio and allow firms to leverage more loans from banks (or issuing bonds)”, the bank continued, adding that “in the context of supporting infrastructure investment, this can be compared to the function of the special construction fund initiated in Q3 2015, which supported projects through injecting capital into projects.”

(Goldman)

Clearly, this suggests that Beijing is pressing ahead with efforts to cushion the blow from the trade war by rolling out more stimulus. Shares of China Railway and JSTI Group logged remarkable gains on the session, as did other construction-related names.

That wasn’t the only comforting news out of China on Tuesday. Traders are fixated on the psychologically important 7-handle for the yuan since Friday’s remarks from PBoC chief Yi Gang, who told Bloomberg there is no “red line” for the currency. That, along with Yi’s comments about “tremendous” room for policy easing, have the market on high alert for a breach of a level the central bank has defended during previous episodes of depreciation.

Read more: 7 Is Coming: China’s Yuan To Breach Key Level Within Three Months, Goldman Says

On Tuesday, the PBoC set the fix stronger than expected, helping to allay fears that the currency is being weaponized in the trade war. The yuan subsequently gained the most in three weeks.

In addition to the strong fix, the PBoC also said it would sell bills in Hong Kong later this month. That’s becoming a go-to strategy for tightening offshore liquidity and supporting the currency. Commerzbank called this “a warning for bears”. Other strategists suggested Tuesday’s actions mean 7 is out of the question in the near term.

We’ll see about that.

Trump on Monday again accused China of manipulating its currency to blunt the effects of the tariffs. He also lamented the fact that he doesn’t hold the same sway over the Fed as Xi does over Chinese monetary policy.


 

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