China’s latest monetary easing to calm markets – analysts

SINGAPORE (ICIS)–China’s decision to cut interest rates and relax its reserve requirements for banks will in the immediate term help calm financial markets that has been weighing on sentiment in the petrochemical trade in Asia, analysts said on Wednesday.

But the central bank’s latest move will unlikely help reverse the massive losses seen in equities thus far, the analysts added.

In a move that was largely anticipated after the sharp declines in equity prices, the People’s Bank of China (PBoC) late on Tuesday cut interest rates and relaxed reserve requirements for the second time in two months, lowering the one-year benchmark bank lending rate by 25 basis points to 4.6%, effective Wednesday.

The central bank also reduced one-year benchmark deposit rates by 25 basis points to 1.75%, and will lower the reserve requirement ratio (RRR) by 50 basis points to 18.0% for most big banks, effective 6 September.

“The move should help stabilize fragile investor sentiment and ensure economic growth momentum to stay on track, although it is unlikely to reverse much of the losses in the equity market,” said Singapore-based UOB Global Economics & Market Research.

It was the second time since late June that China had taken the rare easing step of cutting both interest rates and the RRR on the same day.

The last time was during the height of the global financial crisis, according to Morgan Stanley Wealth Management Research.

Asian equity markets were mostly higher (please see table below) after a volatile session on Tuesday, with the Shanghai Composite extending its worst rout in almost 20 years 

The mainland benchmark index plunged 7.63%, or 244.94 points, to 2,964.97, wiping out the year’s gains and continuing its steepest four-day rout since 1996.

The major US equity indexes initially jumped, fuelled by the Chinese interest rate and RRR cuts.

However, gains were completely surrendered as investor confidence waned amid continued concerns about China and global growth, it said.

Regional petrochemical shares recovered some ground in early trade on Wednesday after mostly ending lower in the previous session but China state-owned majors were still crashing.

At around 12:00 hours Singapore time (04:00 GMT), Chinese energy giant PetroChina was down by 2.69% while Sinopec Shanghai Petrochemical slipped by 1.03%.

South Korea’s LG Chem climbed 1.60% higher while Taiwan-based producer Formosa Petrochemical Corp (FPCC) was up by 0.76%.

Singapore-listed palm oil major and oleochemicals maker Wilmar was 1.80% lower while Thailand’s polyester major Indorama Ventures Ltd fell by 2.01%.

Crude oil prices were trading above the previous session close on Wednesday morning amid concerns over the Chinese economy, with October WTI up by 39 cents at $39.70/bbl and October Brent 37 cents higher $43.58/bbl.

On the markets front, open-spec naphtha valuations fell by $7-8/tonne to $379-382/tonne CFR Japan amid concerns of rising supply and shrinking demand.

In the Asian aromatics market, prices of toluene were assessed higher at midday on Wednesday while benzene was down by $2-9/tonne at $529-548/tonne FOB Korea.

Prices of ethylene were stable while prices of propylene were lower with buying ideas capped at $700/tonne to the low $700s/tonne CFR NE Asia for September delivery cargoes. 

Asian nylon prices, meanwhile, continued to tumble this week as the rout in the regional stock markets weighed on sentiment.

“The challenge facing China now is not so much about short term liquidity but the absence of a sustainable growth driver,” said Singapore-based DBS Group Research.

“Overcapacity is plaguing investment as evidenced by more than 40 consecutive months of negative producer price index (PPI) reading,” it added.

China’s exports are being undermined by weakening external demand while domestic private consumption has been weighed by the meltdown of the equity markets, it said.

“Only the deployment of an expansionary fiscal policy could break the vicious downward cycle now. The likelihood of such a package is very high,” it added.

Any new fiscal initiatives by Beijing will likely target projects that will increase the pace of urbanisation in China, according to DBS.

“Interest rates and RRR will likely go down further, gradually, from this level. This will also translate into a weaker RMB going forward. That said, they won’t be able to bring a short-term turnaround on growth. They also help mitigate economic pains at the margin. Fiscal policy is the dominant strategy now,” it added.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

Focus article by Nurluqman Suratman