PBOC Cuts Key Rate to Shore Up Sentiment After Stocks Slump

OREANDA-NEWS. In response to the sell-down in Chinese equities last week, the People’s Bank of China (PBOC) cut the one-year lending rate by 25 basis points to 4.85% on Saturday – its fourth reduction since November – and lowered the amount of reserves certain banks are required to hold by 50 basis points.

The PBOC’s move ignited a short-lived rally on Monday, which quickly fizzled out. The SGX FTSE China A50 Index Futures contract served as a guide for the cash index’s opening. The contract opened at 11,945 and traded at 12,265.0 at 9.30 am,  while the FTSE China A50 Index opened at 12,069.45. The SGX FTSE China A50 Futures saw a record daily volume of 1,644,872 contracts traded on the same day as market participants used the futures to manage their exposure.

Source: Bloomberg

Source: Singapore Exchange

The benchmark FTSE China A50 index tumbled 6.6% on Friday. Analysts cited various reasons for the sell-down, including deleveraging, unsustainable valuations and extreme volatility.

Last week’s market rout highlighted the volatility in Chinese equities. The China A50 Index’s 10-day volatility reading jumped to 53.98 on Friday from 34.79 the previous week.

Correspondingly, margin debt fell for the first time since November. Total margin debt as recorded by the Shanghai and Shenzhen Exchanges slipped to RMB2.127 trillion on 26 June from RMB2.269 trillion on 18 June.

Source: Shanghai and Shenzhen Exchanges

SGX FTSE China A50 Index Futures’ T+1 Performance

In a mere six months, four notable off-market announcements issued by various entities moved markets.

On 16 January after market close, the China Securities Regulatory Commission announced that Citic Securities, Haitong Securities and Guotai Junan Securities Co were suspended from lending money and stocks to new clients for three months. Punishment was also meted out to nine other brokerages for allowing unqualified investors to open margin finance and securities lending accounts. On the same day, the China Banking Regulatory Commission banned banks from lending to companies that borrow to invest in equities, bonds, futures and derivatives. The SGX FTSE China A50 Index futures, in response, edged lower.

Source: Bloomberg and Singapore Exchange

A similar incident took place on 17 April. After the cash equities market closed, the China Securities Regulatory Commission announced it will allow fund managers to lend shares for short-selling, and expand the number of stocks investors can short-sell, in a bid to raise the supply of securities in the market. The FTSE China A50 Index slumped 2.26% the next day.

Hedgers and traders using stock-index derivatives, however, took full advantage of the news to hedge their positions. Correspondingly, the SGX FTSE China A50 Index futures saw robust interest during this period.

Other off-market announcements, however, have been more positive.

On 4 February, the People’s Bank of China (PBOC) announced a cut in the banks' reserve requirement ratio (RRR) by 50 basis points to 19.5%. Likewise, traders took advantage of the extended trading hours of the SGX FTSE China A50 Index Futures to manage their positions.

On 26 May, FTSE Group announced the inclusion of China shares in two transactional indices. The SGX China A50 Futures rose after the announcement in extended-hours trading.

Source: Bloomberg and Singapore Exchange

With various market-moving news occurring after cash markets are closed, there is a clear need for risk-management tools that span US and European time zones.