China Market rises on prospects of a cut in the loan prime rate

The Mainland China equity market closed higher on Thursday, 19 September 2019, as risk sentiments underpinned after China's currency regulator has announced that it would scrap the investment quotas under the QFII and RQFII programmes to allow unrestricted access to world's second-largest capital market. Meanwhile, buying momentum further supported by rising prospects of a cut in the loan prime rate to help bolster the economy following a US Federal Reserve rate cut. At closing bell, the benchmark Shanghai Composite Index rose 0.46%, or 13.62 points, to 2,999.28. The Shenzhen Composite Index, which tracks stocks on China's second exchange, added 1.03%, or 17.02 points, to 1,672.63. The blue-chip CSI300 index rose 0.37%, or 14.30 points, to 3,924.38.

China scrapped two equity investment limits for foreigners, giving global traders unfettered access to the world's second-largest capital market in another move in the country's economic liberalisation. The investment quota limits under the Qualified Foreign Institutional Investors (QFII) scheme, and the Renminbi Qualified Foreign Institutional Investor (RQFII) programme will both be removed, the currency regulator said on Tuesday, without divulging when the changes would take effect. The Qualified Foreign Institutional Investor (QFII) programme, introduced in 2002, lets foreign funds invest onshore in China's yuan-denominated A shares. The RQFII programme, introduced in 2011, gives investors access to offshore renminbi to buy mainland-traded stocks.

 

The removal of the first quota, after 17 years of a gradual, regulated opening of China's equities, removes one of the major vestiges of the country's closed capital markets. It is also a nod to the ongoing negotiations to resolve the year-long US-China trade war, which has sought to remove restrictions on foreign investments, address American concerns of China's track record on intellectual property, among other trade issues.

Market pundit expects People's Bank of China (PBOC) likely to set Loan Prime Rates (LPRs) lower at Friday's monthly fixing. A cut in LPRs - China's benchmark rates for new loans - could lead to lower borrowing costs for consumers and companies in a slowing economy. China trimmed the revamped Loan Prime Rate (LPR) on Aug. 20, as the central bank kicked off interest rate reforms designed to reduce corporate borrowing costs in the world's second-largest economy.

The US central bank's Federal Open Market Committee on Wednesday reduced its benchmark interest rate by 25 basis points to a range of 1.75% to 2%, the second cut this year, in a bid to stimulate the economy amid growing global headwinds. The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed this week. Projections show Fed officials are divided on the path for rates but do not expect additional cuts this year or next, disappointing a market that had been looking for further easing.

The largest percentage gainers in the main Shanghai Composite index were Shanghai Feilo Acoustics Co, up 10.1%, followed by CSD Water Service Co, gaining 10% and Ningbo Tianlong Electronics Co, up by 10%. The largest percentage losses in the Shanghai index were Zhejiang Guangsha Co down 7.7%, followed by Jiangsu Shemar Electric Co losing 7.4% and Shanghai Environment Group Co down by 5.8%.

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