China Markets Rally as Authorities Take Steps to Lift Sentiment

Chinese stocks jumped after authorities announced a slew of measures to woo back investors including a reduction of the stamp duty on stock trades and a slower pace of initial public offerings. The yuan also strengthened.

(Bloomberg) — Chinese stocks jumped after authorities announced a slew of measures to woo back investors including a reduction of the stamp duty on stock trades and a slower pace of initial public offerings. The yuan also strengthened. 

The CSI 300 Index of mainland shares rallied as much as 5.5% early Monday before paring, with some brokerage stocks rising by the limit. The Hang Seng China Enterprises Index rose 4.1%, while the Hang Seng Index advanced more than 3%. 

The levy charged on stock trades will drop from 0.1% to 0.05% as of Aug. 28, the Ministry of Finance said in a statement Sunday, in a move to “invigorate capital markets and boost investor confidence.” The reduction is the first since 2008. 

The China Securities Regulatory Commission also restricted share sales by top stakeholders at firms whose stock prices have fallen below IPO levels or net asset levels and lowered margin ratios for leveraged trades, moves that investors said were a surprise. The regulator stated it will slow the pace of IPOs citing “recent market conditions,” without giving details on how it would do so.  

“The scale, force and speed of the measures all beat expectations,” China International Capital Corp. analysts including Pu Han wrote in a note. “The increasing force of the policy tools will lift market confidence, amplifying the positive signal for the market.” 

Traders said the measures announced in the latest round may have a shot at lifting markets, though questions remain on how long it will last in the absence of concrete steps to revive the real economy. Key indexes already trimmed their opening gains on Monday, while foreign investors were again sellers of onshore shares on a net basis, underscoring concern that China’s economic slowdown is due to structural and entrenched problems that are hard to fix.   

China last cut the stamp duty in April 2008, reducing it to 0.1% to support the market after a plunge, spurring a bull run the following year. The year prior, in May 2007, it raised the rate to 0.3% to cool a rally that was drawing more than 300,000 new investors a day. On the session following the 2008 cut, the Shanghai Composite rallied 9.3%. 

The raft of changes this time are expected to bring the equivalent of 750 billion yuan ($103 billion) of new funds into the market per year, according to estimates from Huatai Securities. “New restrictions on share sales in effect keep around 250 billion yuan of funds from selling, and bring the strongest benefit to liquidity” among the measures, wrote analysts including Wang Yi.  

The market response to stimulus measures has become increasingly muted in recent weeks. On Friday, the unveiling of property stimulus measures sparked an initial flurry of buying, with China’s benchmark CSI 300 Index reversing losses. However, the gauge resumed declines after about 10 minutes and ended the day down 0.4%.

Down about 8% so far in August, an index of the nation’s shares listed in Hong Kong is still one of the world’s worst performers among more than 90 equity gauges tracked by Bloomberg.

Authorities this month urged pension funds, large banks and other big domestic financial institutions to increase stock investments to support the market. Regulators have also cut handling fees on stock transactions, prodded mutual fund managers to increase purchases of their own equity funds and encouraged companies to do more share buybacks.  

‘Bazooka’ Needed

“We expect a rally this week, maybe to a less degree than those after China lowered stamp duty in 2008,” said Neo Wang, Evercore ISI’s New York-based managing director for China Research. Wang added that a turnaround in the A-share market would not happen unless Beijing adopts more “bazooka” measures, such as the 4 trillion yuan stimulus package it rolled out in 2008.

China’s 10-year government bond yield gained as much as five basis points Monday — the most since late July. The yuan advanced as much as 0.3% both onshore and offshore. 

The PBOC set its daily reference rate for the yuan at its strongest since mid-August, continuing a trend of more robust-than-expected fixings for the managed currency. It also injected the most amount of short-term cash to the financial system since February, a measure likely aimed at managing month-end liquidity needs.

“The stamp duty cut, first since 2008, shows the urgency for policymakers to turn around market sentiment, but last time this was followed by massive stimulus, which may not be the case this time around,” said Marvin Chen, an analyst for Bloomberg Intelligence. “The key for a sustained re-rating is still turning around economic growth momentum, and more policy support will be needed.” 

–With assistance from Iris Ouyang, Zhu Lin, Jacob Gu and Janet Paskin.

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