Bullish view fueled by fresh cut in amount banks must hold as reserves
Chinese mainland stocks extended gains on Monday as investors expected ampler liquidity and more easing policies after the central bank's latest move to boost lending.
The market may continue to rally over the rest of this month, with upbeat investor sentiment and foreign inflows accelerated by global investment indexes' inclusions, analysts said.
The benchmark Shanghai Composite Index rose 0.84 percent to close at 3024.74 points on Monday, registering a six-session winning streak. The Shenzhen Component Index jumped by 1.82 percent to 10,001.93 points, the first time the index had closed above 10,000 points since late April.
The ChiNext Index, which is heavy with innovative mid to small-cap companies, soared 2.42 percent to 1733.23 points and entered bullish territory, an advance of more than 20 percent from its recent low in June.
Technology shares led the rise on Monday, with the communications equipment, internet, software and semiconductor sectors posting gains of more than 4 percent, according to financial information provider Wind Info.
The bullish sentiment was fueled by the central bank's fresh cut in the amount of cash that banks must hold as reserves, analysts said. The People's Bank of China announced late on Friday the lowering of the required reserve ratio for all banks by 0.5 percentage point, effective from Sept 16.
On top of the broad-based cut, the PBOC will also cut the ratio for some city commercial banks by 1 percentage point in two steps later this year. The cuts will release 900 billion yuan ($126 billion) in liquidity and lower banks' costs of funds, reducing borrowing costs faced by the real economy, according to the PBOC's website.
"The move lifted the market's expectation of further marginal easing of monetary policy, despite the unchanged overall prudent tone," said Wang Yi, chief strategist with Shenzhen-based Great Wall Securities.
The market expects the authority to soon lower the interest rate of medium-term lending facility, which represents the cost that commercial banks should pay for borrowing from the PBOC, Wang said.
The A-share market may extend gains in the rest of the month, as investor sentiment recovers amid rising expectations of macro stimulus and positive news about the trade tension between China and the United States - the two parties are due to restart trade talks next month, Wang added.
In the mid-to long-run, the cut in reserve requirement ratio will help boost corporate earnings and therefore share prices, said Zhang Xia, chief strategist with Shenzhen-based China Merchants Securities.
As banks face lower costs of funds after the cut, they may lower the quotation rates for the formation of the loan prime rate - the newly introduced lending reference rate, lowering corporate borrowing costs and boosting earnings as a result, Zhang said in a report.
Foreign inflow triggered by global indexes' inclusion of A shares may cement the market rally in September, according to Zhang.
Global index provider S&P Dow Jones Indices announced last week that it would add 1,099 A shares into the S&P Emerging Broad Market Index, one of its investment benchmarks used by global money managers. Once the inclusion takes effect on Sept 23 as scheduled, A shares are projected to represent a weight of 6.2 percent in the index.
Also on Sept 23, another major index complier FTSE Russell is due to roughly triple the weighting of more than 1,000 A shares in its global benchmarks and include 87 new A-share constituents.
On the back of the inclusions, a total of $5.1 billion in passively-managed overseas funds tracking the indexes - or worldwide portfolios whose allocations synchronize with every change in the indexes - is expected to flow into A shares this month, according to Zhang.
Inflow of actively managed funds, which use the indexes as investment benchmarks, may also speed up, based on the premise of no major escalation in the trade tension or yuan depreciation, Zhang said.