23 February 2019
Rising interbank rates keep Chinese equities in check. Photo: Reuters
Rising interbank rates keep Chinese equities in check. Photo: Reuters

Why China equities are stuck in a range

The Shanghai Composite Index has been hovering around 3,200 points for more than a month, with the overall turnover of the Shanghai and Shenzhen bourses at about 500 billion yuan (US$72.53 billion) most of the time.

Despite expectations of fresh policy impetus, no major breakthrough was seen during the two sessions of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC).

There was no major selling pressure either after the big political meetings were over.

The dull performance of the mainland stock market can be attributed to two factors — tightening bias of monetary policy and lack of fresh triggers.

The Shanghai interbank offered rate has been climbing. In fact, China has moved to tighten monetary policy after the US Federal Reserve announced a rate hike earlier this month.

The People’s Bank of China has raised the reverse repo and the medium-term lending facility rates by 10 basis points each. It marked the second increase this year.

Meanwhile, Chinese commercial banks are preparing for the so-called macro-prudential assessment due at end of the first quarter.

The assessment will cover banks’ capital adequacy, leverage ratios, assets and liabilities, credit quality, pricing of interest rates, cross-border financial risk and credit policy execution.

The results of the assessment will determine whether a bank can obtain reserve requirement funding at a preferential rate, which will have direct impact on lending activities and profitability.

Most banks are hence more conservative with their lending, which may affect the stock market in a negative way.

China’s stock market has failed to gain momentum also because the authorities did not unveil more policy incentives after the two sessions.

The long-awaited stock buying from the nation’s pension funds has fallen short of expectations in terms of the size of the purchase.

This article appeared in the Hong Kong Economic Journal on Mar. 23

Translation by Julie Zhu

[Chinese version 中文版]

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