China Market rebounds on bargain hunting

The Mainland China equity market rebounded on Tuesday, 09 October 2018, as traders chased for bottom fishing on heavily battered stocks after China's stocks and currency slumped on Monday because of mounting concerns about the country's economy, even as the country's central bank moved over the weekend to free up more money and encourage banks to lend. Around late afternoon trade, the benchmark Shanghai Composite Index rebounded 0.5%, or 13.30 points, to 2,729.81, meanwhile the Shenzhen Composite Index, which tracks stocks on China's second exchange, added 0.14%, or 1.93 points, to 1,388.21. The blue-chip CSI300 index rose 0.3%, or 10.18 points, to 3,301.08.

The People's Bank of China had lowered the required reserve ratio (RRR) as it looks to shore up the economy after a series of weak data, amid Beijing's trade war with Washington. The People's Bank of China's move over the weekend to reduce how much cash lenders must hold as reserves -- the so-called reserve requirement ratio (RRR) -- came as challenges to the economy grow, including fallout from the US-China trade war. As per reports, the reduction in RRR could pump about $175 billion into the economy, especially to small to medium size businesses. China's RRR cut reinforces expectations of more policy easing ahead, putting China on a divergent path of monetary policies with the United States, where 10-year treasuries yields hit seven-year highs as the Federal Reserves keeps raising rates. Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.633% on Oct. 8. That compares with the 3.227% yield for U.S. bonds, the highest level since May, 2011. The narrowing interest rate differentials between China and the U.S. will exert more downward pressure on the RMB. The Yuan had slid to its lowest official close against the dollar in seven weeks on expectations Beijing would follow Sunday's policy easing with more stimulus. On Monday, a senior US Treasury official expressed concern at the fall in the yuan, adding that it was unclear whether Treasury Secretary Steven Mnuchin would meet with any Chinese officials this week.

CURRENC NEWS: China's yuan declined against the U.S. dollar on Tuesday, inline with soft mid-point fixing by People Bank of China. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.9019 per dollar, weakened by 62 basis points from midpoint rate of 6.8957 set on Monday.

Investors are stepping up building positions betting the yuan will drop to 7 per dollar now after the currency breached 6.9. The RRR cut sends a strong signal that China is in an easing cycle and all external news makes the case for a stronger dollar. The yuan has tumbled 9 percent against the dollar in the last six months in one of Asia's worst performances. If it weakens past its August low of 6.9340, the exchange rate would be the lowest since January 2017, when the authorities stabilized the currency through a mix of capital controls and dollar sales.

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