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 After watching share prices tumble around 25 percent in a little
more than a week, the People's Bank of China re-entered the fray
late on Tuesday, cutting interest rates and further loosening bank
lending restrictions.
The response from China's two main stock indexes - never reliable
barometers of the domestic economy - was typically erratic, lurching
between gains and losses of more than 3 percent before ending the
day modestly lower.
European markets had risen sharply immediately after the People's
Bank of China's move on Tuesday, but U.S. indexes turned negative
after an initial leap, setting the tone for a lackluster session in
Asia on Wednesday. [MKTS/GLOB]
"The whole market sentiment is still risk-off, which is why markets
have taken the latest move from Beijing in their stride and believe
more is needed to restore investor sentiment," said Grace Tam,
global markets strategist at JP Morgan Asset Management in Hong
Kong.
The CSI300 index <.CSI300> of the biggest listed companies in
Shanghai and Shenzhen closed down 0.6 percent, while the Shanghai
Composite Index <.SSEC> fell 1.3 percent.
Investors' caution was understandable, said Lim Say Boon, Chief
Investment Officer at DBS Bank, as the policy moves would have
little impact on consumption in a nation of savers, or investment in
a country where government, not the "animal spirits of the private
sector", takes the lead.
"What the market is waiting for (is) the 'big bazooka' of government
spending," he wrote in a note.
There was also concern that the PBOC was simply playing catch-up.
ANZ Bank noted that, even after four interest rate cuts since
November, the negative producer price index (PPI) was keeping real
borrowing costs elevated.
"With the PPI at minus 5.4 percent y/y in July, the real interest
rate costs could be well above 10 percent," it said.
"We believe that the traditional monetary policy easing, such as
cutting RRR (reserve requirement ratio) and lowering the interest
rate, is not sufficient to mitigate the risks associated with
China's highly leveraged economy," it added.
SURPRISE DEVALUATION
Concerns about China's economy intensified after factory activity
shrank at its fastest pace in almost 6-1/2 years and the central
bank unexpectedly devalued its yuan currency earlier this month.
There is, however, little evidence that the stock market mayhem has
hit consumer spending so far.
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Confidence among Chinese consumers rose for the third consecutive
month in August, according to a Westpac MNI survey, as household
finances continued to improve.
OCBC Bank noted that cuts in the RRR were needed to ease the
liquidity pressures created by capital outflows that had been
exacerbated by the yuan devaluation. It said it expected at least
another 100 basis point cut this year.
Japanese automaker Suzuki Motor Corp highlighted the problem
manufacturers in China face, with its sales faltering as the economy
slows. It said on Wednesday it needed to adjust its production
capacity in the country, which was roughly twice what it could sell.
"Currently, there is still downward pressure on China's economic
growth," the central bank acknowledged on Tuesday.
Investors are also concerned that China is growing at a much slower
pace than the official 7 percent target for 2015.
Despite that, a majority of economists predict a continued
deceleration - rather than a crash - for China's economy, and most
dismiss comparisons with the 2008 global financial crisis or the
1997/98 crisis in Asia.
"The upshot is that there is no sign in the recent data of a
deepening economic crisis," wrote analysts at Capital Economics.
"With policy support gathering force, a rebound in growth still
looks the most likely outturn for the next couple of quarters."
(Additional reporting by Pete Sweeney in Hong Kong, Nathaniel Taplin
and Kazunori Takada in Shanghai and Koh Gui Qing in Beijing; Writing
by Will Waterman; Editing by Alex Richardson)
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