Vienna, Austria, May 29, 2015 --(PR.com
)-- The People's Bank of China said last month that it would lower the amount of cash banks are required to hold in reserves by 100 basis points, or 1 percentage point, effective immediately. Some rural lenders were allowed to cut their ratios even more.
The move had been anticipated as the economy continued to slow in the first quarter, but many analysts said they were surprised by the strength of the reduction. Previous cuts to the ratio were seldom higher than half a percentage point.
Michael Woods, a Senior Portfolio Manager at Norbert Mach, said, “This change has already injected around 1.5 trillion yuan into the market.”
“The A-share market has fluctuated widely since, as investors have weighed the central bank's move against the security regulator's announcement three days earlier that it would tighten the regulation for margin trading – which allows investors to buy stocks with money borrowed from brokers – and encourage the development of short selling,” continued Mr. Woods.
“The reason behind the ratio cut was to support local governments' bond sales,” Michael Woods said. “About 640 billion yuan worth of bonds issued by platform vehicles backed by local governments are due this year, up 68 percent from a year ago. Local governments are allowed to issue bonds and use the proceeds to repay some of the debt. But rising capital costs as reflected by the growing yields of central government bonds mean it now costs more for local governments to issue bonds,” Woods added.
Alexander Wilson, also a Senior Portfolio at Norbert Mach in Vienna, added, “The policymakers wanted to reduce capital costs by loosening the money supply but it also apparently feared that the extra liquidity would simply flow to the stock market and not be used by the real economy.”
“They said the securities regulators' move was aimed at cooling stock investments so capital would not be drained from the real economy,” stated Wilson.
“However, nearly 40 percent of our new stock trading accounts that were opened in the past month have been opened by Chinese citizens. That’s a huge increase compared to our normal figures. So it’s clear to see that Chinese investors have not fled the market and it will be very interesting to see how the market pans out going into June and July,” said Wilson.