China’s central bank has tightened its monetary policy as shown by the higher rates it charges in its open-market operations.
Previously, the Central Economic Work Conference set a target to drive down leverage in the financial sector. The monetary policy stance will return to neutral from loose.
In line with this policy direction, the People’s Bank of China increased lending rates under its standing lending facility and reverse repurchase agreements last week, following a medium-term lending facility rate rise shortly before the Lunar New Year holiday.
Rising rates may hurt the stock market in the short term.
In the meantime, a massive amount of locked-up shares will be available for trading this month. That could also bring a negative impact.
Global markets are mired in heightened uncertainty brought about by Donald Trump’s controversial policy initiatives.
External market correction could affect sentiment in A shares in the short term.
But there are also a number of positive factors that could offset the downward pressure.
First of all, the purchasing managers’ index, a leading indicator, has started to bottom out since the fourth quarter of last year, and the producer price index has returned to positive territory.
Profits in China’s industrial sector also picked up. The economic downturn has eased and corporate earnings may improve.
The US dollar has lost some of its gains after Trump questioned its strength. Investors might sell dollar assets and swap into other markets such as China equities.
The nation’s pension funds are expected to step up their investment in domestic stocks that could also provide a boost.
Investors are advised to stay vigilant to potential risks but there is no need to be overly negative.
This article appeared in the Hong Kong Economic Journal on Feb. 6
Translation by Julie Zhu
[Chinese version 中文版]
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