Chinese markets rally after Beijing pledges to slash rates, support stocks

Chinese stocks posted their best day in years on Tuesday, the yuan jumped and bonds rallied briefly after Beijing announced a slate of support measures including rate cuts and fresh funding for equity purchases, in a bid to prop up the ailing economy.

In a closely watched press conference on Tuesday, the People's Bank of China (PBOC) unveiled its biggest stimulus since the pandemic - a move which breathed new life into beaten-down Chinese stocks and boosted the yuan to a 16-month high.

China's CSI300 blue-chip index ended the day 4.3% higher, its largest daily percentage gain since March 2022, while the Shanghai Composite Index surged 4.2%, the most since July 2020.

Hong Kong's Hang Seng Index topped the 19,000 level for the first time since May 28 and closed up 4.1%.

The gains came after PBOC Governor Pan Gongsheng said earlier in the day that 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 inject more liquidity into the economy and lower borrowing costs.

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.

"The market reaction so far, I think is positive," said Khoon Goh, head of Asia research at ANZ, "The package of measures so far, I would say, is probably larger than what market was expecting."

Cuts to existing mortgage rates also lifted shares of property firms, as mainland-listed property stocks climbed 1.7%. Hong Kong's Hang Seng Mainland Properties Index closed up more than 5%.

Elsewhere, Chinese bonds rallied in an initial knee-jerk reaction to the larger-than-expected rate cuts, though pared gains over the course of the day as investors took profits.

The benchmark 10-year government bond yield dropped to a low of 2%, before trading roughly 6 basis points higher at 2.065%. 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 roughly 1%.

FRESH FUNDS

Also fuelling the surge in stocks was news that China will roll out two structural monetary policy tools for the first time to boost the country's capital market.

The first - a swap programme sized at an initial 500 billion yuan - allows funds, insurers and brokers easier access to funding in order to buy stocks. The second provides up to 300 billion yuan in first batch cheap PBOC loans to commercial banks to help them fund other entities' share purchases and buybacks.

"We view this as a breakthrough in Beijing's mindset in supporting the capital market, as it means the 'national team' can tap into the central bank balance sheet for liquidity," said analysts at Morgan Stanley in a note.

"That said, detailed criteria will still bear monitoring to gauge its effectiveness."

Pan also told reporters PBOC is studying on a stabilization fund for stocks, but did not provide details.

Plagued by capital outflows as investors continue to pull money out of China amid uncertainty over its growth outlook, the CSI300 index and Shanghai Composite Index have been languishing near seven-month lows in recent sessions.

Despite Tuesday's gains, both indexes are still down more than 2% for the year thus far.

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%.

The yuan rose to its strongest level since May 2023 in both the onshore and offshore markets as traders hoped Tuesday's measures would help get China's bumpy economic recovery back on track.

By 0910 GMT, the onshore yuan was 0.28% higher at 7.0330 per dollar.

"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.”