Share prices plunge to two-year low

Reserve requirement ratio cuts benefit firms engaged in debt-for-equity swaps

Chinese stocks gave up early gains to close at a two-year low on Monday, as a reserve requirement ratio cut could not outweigh weak sentiment from trade tensions, the weakening yuan and deleveraging efforts.

The benchmark Shanghai Composite Index declined by 1.05 percent to 2859.34 points on Monday. The Shenzhen Component Index slid 0.9 percent and the ChiNext startup index fell 0.72 percent.

The People’s Bank of China announced on Sunday that it will cut the cash amount commercial banks are required to hold in reserve by 50 basis points starting from July 5, a measure to facilitate targeted lending to small and microenterprises.

The reduction in reserves, the third such move by the central bank this year, had been widely anticipated by investors.

Investors competed for listed companies related to debt-forequity swaps on Monday. Fujian Mindong Electric Power Ltd Co, Tianjin Printronics Circuit Corp, Hainan Haide Industry Co Ltd, and others increased by the daily limit of 10 percent.

“Reserve requirement ratio cuts largely benefit listed companies related to debt-for-equity swaps, but the overall A-share market is weak as investors are concerned about escalating trade tensions and the yuan depreciating,” said Deng Haiqing, visiting finance professor at Renmin University of China.

The yuan fell on Monday to a five and a half month low against the US dollar, effectively erasing all of this year’s gains.

Real estate firms tumbled 4.9 percent on Monday, as the currency depreciation raised fears of capital outflow that could weigh on asset prices.

Airline shares also plunged, with Air China Ltd and China Eastern Airlines Corp Ltd closing down by the daily limit of 10 percent, on concerns the weakening yuan could bode ill for companies with dollar-denominated debt and push up their fuel costs.

Zhu Haibin, chief China economist and head of China equity strategy at JPMorgan, said the reserve requirement ratio cut this time is not a reversal of deleveraging efforts.

“In our view, the pace of deleveraging may be finetuned to ease tail risk, but policymakers are unlikely to change their course,” Zhu said. “Going forward, with monetary policy turning away from the tightening bias, financial deleveraging will likely be achieved by regulatory measures, such as the enforcement of the asset management regulation finalized on April 27.”

Freddy Wong, fixed income portfolio manager of Fidelity International, said the cuts would release liquidity totaling around 500 billion yuan ($76.4 billion) to 700 billion yuan into the market.

“Given the current focus on small and microenterprises, we do not expect a significant change on the current funding cost given the current policies, and reserve requirement ratio cuts aim to provide liquidity but not to lower financing costs,” Wong said.