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China Rate Cut Boosts Stocks — But Will Limiting Quant Trading Backfire?

Last Updated February 21, 2024 11:36 AM
Giuseppe Ciccomascolo
Last Updated February 21, 2024 11:36 AM

Key Takeaways

  • The People’s Bank of China (PBOC) reduced its key five-year loan prime rate.
  • It is the biggest cut since 2019.
  • Stock markets in Hong Kong and Shanghai rose after the rate cut.
  • But a limit to quant trading may hit local financial markets.

Chinese stock markets surged a day after the People’s Bank of China (PBOC) historic rate cut, as stock exchange authorities began banning short-selling of computer-managed quant funds.

This decision raises questions: will it revive the housing market? And how will it impact global financial markets already grappling with tightening policies?

PBoC Historic Rate Cut

China’s central bank took decisive action  on Tuesday, February 20, 2024, by reducing a key benchmark lending rate utilized for pricing mortgages. This move comes as part of Beijing’s strategy to stabilize its housing market amid a deepening crisis, while simultaneously injecting vitality into the nation’s economy.

China’s economic landscape has been challenged by a confluence of factors. These include a prolonged downturn in the property sector, escalating youth unemployment, and a global deceleration that has significantly impacted demand for goods from the world’s second-largest economy.

The reduction in the five-year loan prime rate, announced  by the People’s Bank of China, demonstrates a substantial shift from the previous rate of 4.2% to a more favorable 3.95%. This marks the most significant rate cut since its inception in 2019, surpassing expectations set by economists polled by Bloomberg.

Contrary to the majority of other major economies where interest rates have been raised to combat inflation, China’s decision to lower rates aims to stimulate credit accessibility and promote favorable lending conditions. The one-year LPR, a pivotal benchmark for corporate loans, remained steady at 3.45%. Notably, this adjustment follows the last reduction in August for the one-year rate and in June for the five-year LPR.

The central bank’s actions incentivize commercial banks to extend credit at more advantageous terms, thereby stimulating economic activity. This stands in stark contrast to the global trend of tightening monetary policies in response to inflationary pressures, contributing to a slowdown in demand for Chinese exports.

Stocks Rose After Central Bank’s Move

Hong Kong’s market surged by 1.6%, hitting a peak of 3% during the afternoon session, while Shanghai experienced a 1% increase by the close of trading.

Market analysts attributed this upward momentum to a delayed response to China’s recent rate cut.

Dickie Wong, Executive Director of Research at Kingston Securities, noted  the unexpected influx of capital into the onshore market via the stock connect mechanism earlier in the day. He also indicated a positive market sentiment in response to China’s monetary policy adjustment. He added:

“I think investors are reacting to the bigger-than-expected 5 year LPR rate cut after they have had some time to react and think about the recent increased measure to support the property market.”

Will Limiting Quant Trading Hit Local Financial Markets?

Beijing is reassessing the regulatory framework governing China’s burgeoning quant trading sector in light of recent developments. Actions include a notable trading ban imposed on one of the sector’s major players for engaging in short-selling activities.

To enhance oversight, the Shanghai and Shenzhen stock exchanges jointly announced the initiation of a comprehensive monitoring initiative. This is in collaboration with the China Securities Regulatory Commission, specifically targeting the market activities of computer-managed quant funds. These funds, which rely on sophisticated automated trading strategies, will now undergo rigorous scrutiny.

New quant funds will need to disclose their investment strategies to regulatory authorities prior to commencing trading activities. Importantly, this regulatory requirement will extend to include quant trading activities involving offshore shares, conducted through Hong Kong’s Stock Connect program. This will ensure a more comprehensive oversight of the sector.

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