Just hours after the PBOC unveiled an FX required reserve cut on Monday to prop up the suddenly sliding Chinese currency, on Tuesday the Chinese central bank went two for two when it said that recent market fluctuations were driven by investor expectations and sentiment, and vowed - again - to increase policy support and promote “healthy and stable” financial market development, according to a statement from PBOC, similar to what it did a month ago when it sparked a major Chinese stock squeeze which however promptly fizzled.
Among the various assurances by the PBOC meant to prop up risk assets were:
- PBOC vows to keep liquidity reasonably ample
- PBOC promises to increase support for the real economy via prudent monetary policy, especially for industries hit hard by the pandemic and smaller businesses
- PBOC vows to complete rectifications of major platform companies as quickly as possible, statement says, without giving a timetable
- PBOC will increase 100b yuan of relending quota for coal mining, use and storage
- PBOC will also add relending quota for aviation sector, statement says, without offering value
Predictably, the kneejerk response was favorable, with the yuan strengthening and Chinese equities turning higher. The CSI 300 index, which yesterday plunged at the fastest pace since 2020, rebounded 1.4% and ChiNext rose 2% while the Hang Seng Tech index jumped more than 5% as the central bank vows to complete internet platform-company rectification quickly; the kneejerk euphoria also helped prop up S&P futures which rose 0.2% and Euro Stoxx futures rebound about 1.6% (before fading all gains) while the dollar weakens against all G-10 majors with Aussie leading the winners; hopes that China would stabilize its flailing economy also pushed WTI crude futures 1% to near $99.40; with gold adds about $5 to rise back over $1,903.
However, after the early bounce, Asian stocks pared most of their early Tuesday advance and Chinese shares gave up all gains spurred by the PBOCs's renewed pledge to support the region’s biggest economy. The MSCI Asia Pacific Index closed up 0.3% versus an earlier rally of as much as 0.8%, with China’s CSI 300 Index ended 0.8% lower as worries about a potential city-wide lockdown in Beijing weighed on sentiment.
Still, a gauge of the nation’s tech stocks jumped almost 3% in Hong Kong on fresh policy promises to end a regulatory crackdown in the sector.
In other words, traders have had their fill of jawboning and hollow rhetoric from the PBOC and now demand solid actions; until then expect to see more weakness in both local stocks and the yuan. Meanwhile, China’s expanded Covid-19 testing to most of Beijing has sparked fears about an unprecedented lockdown and even faster economic slowdown.
As such, traders say a change in the nation’s Covid-Zero strategy is the key to turning around sentiment. “It would be difficult to see a quick improvement in sentiment” amid weak market fundamentals and fund flows, said Kim Kyung Hwan, a Chinese equity strategist at Hana Financial Investment in Seoul. “Market players are waiting for stronger measures, such as an interest-rate cut.”
To get that cut, however, stocks will first have to drop much more - as BofA's Michael Hartnett often repeats, "markets stop panicking when officials start panicking."