China's shares fall, the central bank's move in favor of the economy hates the shoulders

SHANGHAI (Reuters) – Chinese stocks fell on Monday, as investors returned from their holidays after a long period of dumping, despite the Beijing weekend decision to further stimulate lending, while Growing fears would only worsen the economic impact of the Sino-US trade war.

Yuan spot CNY = CFXS closed the afternoon to its lowest official level of closing in seven weeks against the US dollar, while the expectations of easing measures taken by China, combined with the rise US bond yields put pressure on the Chinese currency.

Beijing has stepped up its liquidity support in recent months over the last few months, as policymakers focused on easing fears of capital outflows and seeking to appease the ruined markets as fear of A merciless trade war with the United States could be a blow to the other. the economy in general.

"There is a glaring lack of confidence in the market. Few investors buy, "said Alvin Ngan, an analyst at Zhongtai International, based in Hong Kong.

"The Chinese economy is under a lot of downward pressure … and you need time to know whether the recent easing measures are effective or not," he added.

On Monday, the CSI300 first-class .CSI300 index fell 4.3% to 3,290.90 points, its largest decline in a day since February 2016.

The Shanghai Composite Index .SSEC lost 3.7% to 2,716.51 points, its worst day since June 19th.

For the year, both Chinese indices are down about 18%.

In Hong Kong, the Hang Seng .HSI benchmark lost 1.4% to close at its lowest level in 15 months, extending the 4.4% loss recorded last week as investors worry about tensions between the United States and China.

Monday was the first opportunity for mainland investors to react to escalating trade tensions and a sell-off in the Hong Kong markets last week, after a week-long vacation on the mainland to celebrate the National Holiday.

On Sunday, the People's Bank of China (PBOC) announced a 100 basis point reduction in the bank reserve requirement ratio (RRR), redoubling its efforts to support the economy and alleviate market concerns.

"A reduction in the RRR is not enough to counter the impact of the trade war. The economy is rather weak and I see a growing number of companies putting their assets up for sale "because of pessimism, said David Dai, managing director of Shanghai Wisdom Investment Co Ltd, a hedge fund.

"And today's downfall is not surprising after the poor performance of foreign markets during the holidays."

EFFORTS "MALIGN"

Last week, US Vice President Mike Pence stepped up Washington's crackdown on Beijing accusing China of "malicious" attempts to undermine President Donald Trump ahead of next month's congressional elections and military actions. reckless in the South China Sea.

And Friday, Chinese technology stocks listed in Hong Kong, including Lenovo (0992.HK) And ZTE Corp (0763.HK), according to Bloomberg, that the systems of several US companies had been compromised by malicious computer chips inserted by Chinese spies.

China's IT sector .CSIINT fell sharply on Monday, dropping more than 5 percent as it caught up with its peers in Hong Kong. ZTE shares listed in Shenzhen (000063.SZ) was down more than 8% at closing.

The real estate sectors .CSISFBI, .CSI300CS consumers and .CSI300HC health were also among the most affected, with over 4% of losses.

The market neglects the reduction of the RRR – the Chinese central bank announced that this decision would inject 750 billion yuan net ($ 109.2 billion) of money in the banking system – highlights the concerns according to monetary easing would do little to dispel confidence.

"Cutting the average rate of return when the liquidity of the banking system is relatively abundant will probably not have much effect," wrote Zhao Jian, a professor of finance at Jinan University.

"Liquidity is not the problem. The problem is the loss of confidence, "said Zhao, adding that China was in a" cash trap "where the demand for credit from the real economy, especially the private sector, was insufficient. .

(Chart: Trade tensions in the Chinese stock market and foreign exchange markets – tmsnrt.rs/2PlCZGGr)

DIVERGENCE OF POLICIES

China's lower rate of return on equity reinforces expectations of easing monetary policy, putting China on a divergent monetary policy course with the US, where Treasury bond yields at 10 years have reached their highest level in seven years, while the federal reserves are constantly increasing.

China's central 10-year bond yields have trended lower this year, reaching 3.633% on Monday. This compares to the return of 3.227% for US bonds. US10YT = RR, the highest level since May 2011.

"Reducing interest rate differentials between China and the United States will put downward pressure on the RMB," writes Nathan Chow, strategist at DBS Group Research.

The CNY = CFXS spot market opened at $ 6.9000 to the dollar and registered its lowest official closing level since mid-August at 6.9135. The last closing before the long vacation was 6.8725 to the dollar.

Before trading began on Monday, the PBOC set the midpoint of the daily trading band of CNY = PBOC at 6.8957 per dollar, its lowest level since May 11, 2017.

The onshore yuan has weakened by about 5.5% against the dollar this year.

Reflecting the expectations of further weakening of the yuan, CNY1YNDFOR = Hong Kong one-year non-deliverable futures fell to about 7,015 against the dollar on Monday, the lowest level of the last 15 months.

"Faced with growing trade frictions, a moderate depreciation of the yuan is helping exporters and that is what the market is expecting to see," said Tang Xiangbin, currency analyst at China Minsheng Banking Corp.