22 October 2016
The A share of Ping An Insurance Group Co. of China has a more attractive valuation than it H-share peer. Photo: Bloomberg
The A share of Ping An Insurance Group Co. of China has a more attractive valuation than it H-share peer. Photo: Bloomberg

Rate cut makes insurance plays more attractive

Beijing has been busy trying to maintain market order since the turmoil began in July, focusing on heavyweight stocks.

However, it seems that the “national team” decided to stay away despite the market slide in the past two days.

PetroChina (601857.CN) closed after hitting the daily down-limit without any sign of government intervention on Tuesday.

Among the 10 stocks with the highest market caps, eight suffered heavy losses of over 5 percent, and four even touched the daily down-limit.

That indicates that the “national team” did not step in to stem the market slide.

Investor confidence has been shattered by the global market meltdown. The market rescue effort has failed to pay off so far.

However, Beijing has opted for another approach. The Chinese central bank announced on Tuesday night that it would cut the interest rate by 25 basis points and lower the reserve requirement ratio by 50 basis points.

The double-barreled shot was Beijing’s last resort, which was aimed at triggering a strong market rebound after going through a heavy sell-off in recent weeks.

Meanwhile, the Chinese central bank also said it would press ahead with interest rate liberalization.

Small and medium-sized banks are expected to increase their deposit rates to attract more deposits, which would further squeeze their net interest margins.

The real impact on the banking sector depends on their loan growth. And the move is generally neutral for mainland banks.

By contrast, mainland property sector may be the biggest beneficiary of the easing move, as property developers will see lower credit costs and easier mortgage approvals.

Monthly mortgage payments will be cut by 140 yuan (US$21.80) for a 20-year mortgage of one million yuan.

In fact, China’s housing market has been showing signs of recovery since last November following various monetary easing measures.

However, market turnover continued to fall as investors stayed away in view of the continued sharp declines.

The market turnover for Shanghai and Shenzhen was reduced to 646.7 billion yuan on Tuesday.

The latest RRR cut is expected to inject 710 billion yuan into the market, and lower financing cost will also improve market sentiment, which could benefit brokerage stocks.

Also, the interest rate cut has made wealth management and insurance products more attractive, and an uptick in equities will also improve investment returns for insurance firms.

The A shares of Ping An Insurance Group Co. of China (601318.CN) and China Pacific Insurance Group Co. (601601.CN) have more attractive valuations than their H-share peers.

However, the interest rate cut could accelerate capital outflow and add pressure for further yuan devaluation. The offshore renminbi plummeted to nearly 6.5 against the US dollar after the news.

Premier Li Keqiang assured that “there is no basis for continued depreciation of the renminbi”.

Hopefully, the double-barreled easing shot could bail out the stock market.

Also, the central bank needs to think harder about stabilizing the yuan exchange rate.

This article appeared in the Hong Kong Economic Journal on Aug. 26.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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