admin On Thursday, as the central bank’s decision to inject fresh capital into the financial market to increase growth by reducing the amount of cash financial institutions must set aside as reserves provides boots to investor sentiment, share prices rallied on Chinese bourses.
Since late April, the benchmark Shanghai Composite Index rose by 1.15 percent to close at 3085.2 points and the Shenzhen Component Index gained 1.99 percent to close at 10,638.82 points.
According to analyst, the market rally was led by financial companies, internet and technology firms, semiconductor manufacturers, and machinery. The increased growth reflected investors’ expectation of the monetary loosening by the central bank to help ensure reasonably sufficient liquidity in the market and reduce financing costs for companies to stabilize the country’s economic growth.
On Wednesday, the People’s Bank of China said that it will lower banks required reserve ratio by 0.5 percentage point and will be effective from Monday. Additionally, it is expected that this RRR cut, to release about 800 billion yuan ($115 billion) into the financial sector.
Chief strategist at China Securities, Zhang Yulong hoping for ensuring the stability of China’s financial sector and maintain sufficient liquidity in the market ahead of the Lunar New Year holiday due to the latest RRR cut by the central bank.
Zhang said expressed in a research note that it is also beneficial to the stock market and the shares are likely to continue to rise with stocks in sectors like construction, finance and property being the preferred picks of investors.
Another factor for Market confidence was the stabilizing trend of the Chinese economy. In the last month, official purchasing managers’ index of the manufacturing sector, a gauge of factory activity growth in China, stood at 50.2 and it is the second consecutive month that the index has remained in the expansion territory.
Director of macroeconomic analysis at CEBM Group, Zhong Zhengsheng said, “The Chinese economy continued to stabilize in December as business owners’ confidence has been improving and there is a stronger willingness among them to expand production and increase stocks.”
Economists said that the monetary easing could help boost China’s infrastructure investment and credit growth this year, and they are expecting more monetary loosening to come, but China’s policy easing will be modest as policymakers intend to avoid using massive easing to stimulate the economy.
Chief China economist at Swiss bank UBS Wang Tao expressed in a note that more monetary easing should help boost credit growth from 10.8 percent in 2019 to 11.4 percent this year, although this rebound would be much more modest than previous episodes of policy easing.
Wang expected another RRR cut by 0.5 percentage point over the rest of this year and a 0.1 to 0.15 percentage point cut of the medium-term lending facility rate after inflation peaks in the first quarter. Wang said, “Overall, we continue to expect sequential growth momentum to rebound in the first and second quarters and maintain our 2020 GDP growth forecast at 6 percent.”
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