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Stocks sink as rate cuts fail to cheer

By Zhou Yan (China Daily)
Updated: 2008-12-24 07:33

Chinese stocks fell over 4 percent on Tuesday on broad disappointment over the narrow magnitude of the benchmark interest rate cut and weighed down by heavyweight stocks.

An electronic board is reflected on a shareholder's glasses at a brokerage house in Taiyuan, Shanxi province December 23, 2008. Chinese stocks slid 4.55 percent on Tuesday to a three-week closing low, led by financial and property shares after the central bank announced a rate cut that was much smaller than the market had been anticipating.[Agencies]

On the heels of cuts in the US and Japan last week, the People's Bank of China, the central bank, slashed lending and deposit rates by 0.27 percentage point respectively on Monday, effective from Tuesday, to stimulate the stalling economy.

The reserve requirement ratio, which has been cut by 0.5 percentage points, will come into effect from tomorrow.

"The interest rate adjustment is a reflection of the uncertainties perceived by policymakers. It's a more effective and efficient way to allocate resources than administrative measures, " said Yu Song, a Hong Kong-based economist for Goldman Sachs.

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But he said further adjustments are necessary because the real interest rate is still at a historic level amid lower expected inflation.

The benchmark Shanghai Composite Index sank 4.55 percent, or 90.53 points, to close at 1,897.22, with losing stocks outnumbering gainers by 859 to 33. The smaller Shenzhen Component Index dropped 4.69 percent to 6,952.91 points.

"This move came within our expectations, but the breadth is much smaller than our view of around 0.54 to 0.81 percentage points," said Zhang Fan, an analyst at Tebon Securities, adding that the slowdown of November consumer price index growth should indicate significant room for broader interest rate cuts.

The dramatic fall could also be a technical correction, after the rebound last week, to relax most of the systematic risks accumulated earlier, said Mao Nan, an analyst with Orient Securities.

Heavyweights led yesterday's fall. Apart from three stocks in suspension yesterday, all top 50 heavyweight stocks on the A-share market closed lower.

China National Petroleum Corp and Sinopec, the country's major oil and gas suppliers, fell 4.3 percent to close at 10.45 yuan and 7.35 yuan respectively.

All bank and brokerage shares declined yesterday. Hongyuan Securities fell to its daily limits to end at 13.47 yuan. China Construction Bank slid 2.7 percent to 3.97 yuan, while Industrial and Commercial Bank of China fell 2.65 percent.

Property sector also plummeted. Vanke, the country's largest realty developer, fell 4.9 percent to 6.98 yuan. Poly Real Estate Co dropped 6.42 percent to close at 16.03 yuan.

"Going into 2009, we forecast the major index to hover around 1,900 to 2,400 points as there would be ample liquidity in the market under such a relaxed monetary policy, " Mao said.

"Every 0.27 percentage point cut in the benchmark interest rate will lead to cost drops of 6 billion yuan for the listed companies. As such, the latest monetary move would meliorate the economic environment for companies in the long run," he said.