Policy watchers following the economy and capital markets in China may have been left scratching their heads over a series of conflicting announcements and comments released over the last three days. Firstly, in what seemed like measures introduced to cool an alarmingly robust equity market, Chinese regulators altered rules to encourage institutional short selling and banned trading on over-the-counter or non-exchange-listed securities using leverage. The rules aimed to make things less one-sided, but given Chinese equities have been going almost vertically up, the second ‘side’ could only be on the downside. The China A50 futures contracts plunged by more than 5% in late trading on Friday. Then on Saturday, Chairman Zhou Xiaochuan of the PBOC reiterated that which the Chinese authorities have always maintained in an interview in Washington, stating ‘there is definitely room (for cuts to both RRR and interest rates in China). But we need to adjust carefully. It doesn’t mean we will have to utilise it or fully utilise the room.’
Concerned over recent exuberance?
The latter part of this statement may have suggested that he and the PBOC were equally concerned with the ‘exuberance’ that Chinese equities have had of late, with several anecdotes of heavy punting by Chinese retail speculators from all walks. He also suggested that a ‘prudent’ monetary policy should be pursued. Finally, on late Sunday night, PBOC announced a RRR cut for all commercial banks in China. This is something that traders had been courting all along. The surprise here was the magnitude of the cut; 100 basis points. While this would free up close to 1.2 trillion yuan (or US$194 billion) for banks to boost lending, this may also easily spur another leg higher in Chinese equities. Economists and analysts alike have many theories around the inconsistencies of this weekend’s events. Traders there - having got what they wanted - will need to decide whether this is a classic ‘buy-on-rumour-sell-on-news’ story, given the discrepancy of the moves announced. The China A50 has opened up firm this morning, almost completely erasing Friday’s sell down. Before this weekend, one could have argued on a technical basis that a near-term pullback may be on the cards there in view of the capitulation move last Thursday, followed by Friday’s sell off. With the event led nature of the markets there, however, a ‘prudent’ trading strategy is strongly encouraged.
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