Chinese markets welcome central bank easing but hunger for more

By Kazunori Takada

SHANGHAI (Reuters) - Chinese stocks shot up more than 2 percent on Thursday before paring gains and money rates eased after the central bank injected more money into the system to spur bank lending and support the world's second-biggest economy.

The yuan also dipped after the People's Bank of China (PBOC) cut banks' reserve requirement ratios by 50 basis points, a widely expected stimulus move that has helped fuel a stock market rally of nearly 40 percent in the last few months.

"The cut was largely priced in to the stock market (already), but it has reconfirmed an important message to investors that China's monetary cycle has firmly shifted to the loosening camp," Jing Ning, Portfolio Manager at Fidelity Worldwide Investment, wrote in a note to clients.

"The next question is whether this is followed by a rate cut by the PBOC. We will not see the impact of last November's rate decision on the economy until the end of this quarter."

Weighed down by a cooling property market, industrial overcapacity and slowing investment, China's economy grew at its slowest pace in 24 years in 2014 and is expected to cool further to around 7 percent this year, even with additional stimulus.

China's factory sector unexpectedly shrank for the first time in nearly 2-1/2 years in January and firms see more gloom ahead, an official survey showed on Sunday, raising expectations that policymakers will have to take more action to forestall a sharper slowdown.

But Chinese investors, like their counterparts in many other parts of the world around the world, are seeing the glass as half-full and betting that a flood of cash from central banks will continue to boost share prices even as the weaker economy threatens companies' profit margins.

In Shanghai, the CSI300 index was up around 1 percent by early afternoon after surging 2.5 percent at the open, while the Shanghai Composite Index .SSEC was up 0.7 percent after opening up 2.4 percent.

The yuan opened at 6.2560 per dollar and was at 6.2536 at midday, 59 pips away from the previous close.

As the economy cools, money has been flowing out of China, putting downward pressure on the currency and prompting large state-owned banks to step in to sell dollars to ensure the yuan's weakness doesn't trigger even larger outflows.

Analysts at ANZ believe the RRR cut will inject about 600 billion yuan ($95.96 billion) into the banking system, though questions remain over whether the money will fund real economic activity or be channeled into speculation like bigger bets on the stock market.

"We maintain our view that the authorities will not depreciate the currency, as that would risk even more capital outflows, which could prove to be destabilising," ANZ strategists wrote in a daily note.

Money market rates edged down slightly, with the weighted average of the benchmark seven-day bond repurchase agreement was 4.4 percent in late morning, down a moderate 14 basis points from Wednesday.

Economists generally expect the central bank to cut reserve ratios one or two more times this year and lower interest rates again, in addition to pumping more funds into the system as it struggles to bring down persistently high funding costs which are putting further strains on debt-laden Chinese companies.

(Additional reporting by Sue-Lin Wong and Saikat Chatterjee in HONG KONG; Editing by Kim Coghill)