The Shanghai Composite Index ended trading with another 1.3% loss today despite the Chinese central bank's efforts to stablize the market.
In an effort to prop up its tail spinning market, the People’s Bank of China (PBOC) cut the one-year lending rate by 25 basis points to 4.6% and lowered the required reserve ratio (RRR) for banks by 50 basis points. The new monetary policy announced late on August 25 comes after the index has declined by more than 20% since August 20.
It would appear that Chinese investors have not responded favorably to the PBOC efforts to stabilize the market as industry experts believe that the RRR cut overnight added around RMB670 billion into the system but in the end did not help stop the losing-streak
“While China has been providing support to the economy in various ways including monetary policy easing, the situation has not improved meaningfully. Inflation has been falling sharply limiting the impact of nominal rate cuts, and capital outflow from China continues,” explains Arthur Kwong, head of APAC equities at BNP Paribas Investment Partners.
Fears of capital outflows from China were sparked following the sudden 2% devaluation of the renminbi two weeks ago. Since then global markets have been very volatile with US Dow Jones Industrial Index entering a six-day losing streak, dropping further by 1.27% on August 25.
“In the near term, fiscal policies, further increase in the monetary base in China and more quantitative easing on a global basis may help stabilize the markets,” states Kwong.
Other major Asian markets got some relief yesterday following the PBOC’s policy action. The Japanese Nikkei 225 gained 3.20% after closing -3.96% the previous day. In Korea, the KOSPI notched up 2.57%.