SHANGHAI, Feb 21: China’s CSI300 index, which tracks China’s largest listed firms, slid more than 3 percent on Thursday on concerns that recent central bank behavior signalled the beginning of a tightening cycle.
Investors were worried that the central bank was draining funds more aggressively than expected, said Chen Shaodan, analyst at New Times Securities, which she said had sparked worries that a sustained drain on liquidity is in the offing, depressing stock prices.
The People’s Bank of China let a net 910 billion yuan ($145.89 billion) drain from the interbank market this week.
In addition, the central bank this week returned to using longer-term forward repos to drain funds, instead of reverse repos which inject funds, for the first time since June.
‘Re-introduction of a longer-dated, (3-month) draining operation suggests a hawkish bias as it means removing liquidity for a more extended time,’ wrote Dariusz Kowalczyk, senior economist at Credit Agricole CIB, in a research note this morning.
But a money market dealer in China’s interbank market said that the PBOC operations were mostly intended to offset the record-high injection the central bank made prior to the Chinese Spring Festival holiday, which saw markets close for a week.
Money rates inched higher on Thursday but remained at low levels, and the interest rate swap market data suggests that liquidity remains ample.
The dealer speculated the dive on the CSI300 could be more related to signs that the United States might wind down its monetary easing programme earlier than expected, which has depressed sentiment globally.
Real estate markets led off the plunge, following an announcement by China’s cabinet on Wednesday restating intentions to extend a pilot property tax programme to more cities and urging local authorities again to put price control targets on new homes.
‘This really hurt sentiment,’ said Chen of New Times Securities.
However, real estate stocks recovered in late morning. Finance and insurance stocks were the leading drag in the Shanghai Composite Index by midday.
A Reuters report citing sources that PBOC chief Zhou Xiaochuan would be reappointed, despite reaching his mandatory retirement age of 65, also spooked some investors, who believe it signals that Beijing will continue to crack down on inflation and tighten liquidity, analysts said.
Markets in the mainland have been slowly easing back from a peak struck in mid-February following a rally that began at the beginning of December.
($1 = 6.2376 Chinese yuan)
(agencies)_
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