Business / Markets

Bourses regain lost momentum

By XIE YU (China Daily) Updated: 2015-05-12 07:51

The Shanghai Composite Index rebounded 3 percent to close at 4,333.48 points on Monday, reversing last week's losing streak, after the central bank cut benchmark interest rates for the second time this year by 25 basis points to help shore up the flagging economy.

The previous interest rate cut, also by 25 basis points, was on March 1.

Stock analysts said they expected further rate cuts in coming months because important indicators still show that the momentum of economic decline continues to build.

They insisted nobody expects an economic hard landing, but some said there are clear needs for further reduction in the cost of capital to meet the targeted growth rate of 7 percent in 2015.

Encouraged by the prospect of abundant credit at lower cost, many investors rushed back to the market after the weekend, pushing turnover on the Shanghai bourse to 715.2 billion yuan ($116.8 billion) on Monday, up from 559.6 billion yuan the previous trading day.

ChiNext, the Nasdaq-style index tracking growth enterprises listed on the Shenzhen Stock Exchange, soared 6 percent, pushing the average market price-earnings ratio to more than 100 times, compared to average market multiples of no more than 22 times on the Shanghai market.

In Hong Kong, the benchmark Hang Seng Index gained 0.5 percent to 27,718.2, while the Hang Seng China Enterprise index that tracks prices of H shares of mainland enterprises, rose 1 percent.

Analysts said the central bank was sending a strong signal to the market that its monetary easing cycle remains firmly in motion.

To many investors, that was a resounding "buy" signal, analysts said.

"The latest rate cut is widely seen as confirmation that the central bank is committed to pursuing a loose monetary policy and that notion has cleared the pessimism that had cast a dark cloud over the market in the past few weeks," said Wang Zhen, an analyst with China Merchants Securities Co.

"Investors are turning bullish again," he said, predicting the index will reach new highs in coming days.

Of course, it is not all about cheap credit.

The rate cut can help enterprises improve cash flow through savings in interest expenses, said UBS Securities LLC in note to investors. This, in turn, will help contain financial risks in the economy.

Goldman Sachs Group Inc said on Monday the People's Bank of China has now cut lending rates by 65 bps and the reserve requirement ratio by 150 bps since November 21, 2014.

The reduction in RRR alone is estimated to have released around 1.8 trillion yuan into the banking system.

"We do not think the potential for further rate cuts and monetary easing is adequately priced in. Policy easing, coupled with other structural reforms, continues to underpin our re-rating thesis for Chinese equities," a Goldman Sachs team led by Kinger Lau said in a report on Monday.

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