(Nov 24): China’s stocks and bonds rallied, sending the 10-year yield down by the most since 2008, after the central bank unexpectedly cut interest rates. Interbank lending rates dropped and the yuan slid the most in two weeks.
The Shanghai Composite Index of shares advanced 2 percent and a gauge of Chinese equities in Hong Kong jumped 3.5 percent, the biggest gain in a year. The yield on government bonds due September 2024 fell 17 basis points to 3.53 percent as of 11:45 a.m. in Shanghai, which ChinaBond data indicate would be the largest drop for a benchmark 10-year bond since October 2008. The seven-day repurchase rate declined the most since September and the yuan fell 0.13 percent to 6.1326 per dollar.
The People’s Bank of China lowered its one-year lending and deposit rates for the first time in more than two years, stepping up efforts to combat a slowdown in the world’s second- largest economy. Gross domestic product will expand in 2014 by the least in more than two decades, based on the median estimate in a Bloomberg survey, and the inflation rate held last month at the lowest level since January 2010.
“The rate cut has released a signal of looser monetary policies and that the government wants to stabilize growth,” said Wu Kan, a money manager at Shanghai-based Dragon Life Insurance Co., which oversees about $3.3 billion. “It’s quite positive for stocks, particularly those sectors sensitive to interest rates such as developers.”
Poly Real Estate Group Co. jumped by the 10 percent limit in Shanghai, while Country Garden Holdings Co. surged 11 percent in Hong Kong. Gree Electric Appliances Inc. climbed 3 percent in Shenzhen as household appliance makers gained on speculation lower rates will spur consumer spending.
‘Prudent’ Policy
The central bank said the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said in a statement.
The rate cut was a “surprise” that will boost investor sentiment and spur further gains for the stock market, said Hao Hong, managing director of China research at Bocom International Holdings Co.
The central bank lowered its one-year lending rate by 0.4 percentage point to 5.6 percent, and the one-year deposit rate by 0.25 percentage point to 2.75 percent. Only one of 20 economists surveyed by Bloomberg this month forecast the lending rate would be cut this quarter.
IPO Demand
The PBOC has primarily used open-market operations and targeted changes in lenders’ reserve requirements to adjust monetary policy in the past two years. It pumped 769.5 billion yuan ($126 billion) into the banking system in the last two months to spur lending and was said to have again added funds on Nov. 21 as new share sales led to a spike in cash demand.
A rate for overnight loans on the Shanghai Stock Exchange soared to 22.4 percent, from 3.09 percent on Nov. 21, as Shenyin Wanguo Securities Co. estimated initial public offerings due this week will lock up 1.6 trillion yuan.
The seven-day repurchase rate in the interbank market, a gauge of funding availability, fell 24 basis points to 3.42 percent after climbing 53 basis points last week, according to a weighted average compiled by the National Interbank Funding Center. A one-year interest-rate swap based on the seven-day repo fell 19 basis points to 2.93 percent, the biggest drop since April.
Slowing Growth
“The market is clearly pressing for more rate cuts from what we see in the swap move,” said Eugene Leow, a fixed-income strategist in Singapore at DBS Group Holdings Ltd. “I see no clear signs of the economy bottoming out yet. There isn’t sufficient demand if you look at consumer and producer prices.”
GDP will increase 7.4 percent in 2014, the slowest growth since 1990, according to the median estimate of economists surveyed by Bloomberg. Consumer prices rose 1.6 percent from a year earlier in each of the last two months, while producer prices fell in October by the most since March, official data show.
ING Groep NV lowered its year-end forecast for China’s 10- year bond yield to 3.3 percent from 3.5 percent, according to a report today by Tim Condon, Singapore-based head of research in Asia. The bank is also predicting 100 basis points of reductions in the nation’s reserve-requirement ratios in the next two quarters, having previously forecast no change.
“The rate cuts show China sees the need to increase stimulus as it’s concerned that an economic slowdown could deteriorate this quarter,” said Daniel Chan, an analyst at Brilliant & Bright Investment Consultancy Ltd. in Hong Kong. “The yuan is likely to stay weak for now.”