MNI CHINA MONEY WEEK: Market Crosswinds May Stymie PBOC Moves

By Anthony Barton

     LONDON (MNI) - China stocks have consolidated as the new month gets under

way, after regulatory changes for brokerages firms, a deadline extension before

the imposition of the latest round of U.S.-China trade tariffs and technical

momentum all helped the major China indices to extend on their positive start to

the year through the back end of last week and early this week.

     From a purely psychological perspective, 3,000 continues to pose key

resistance for the benchmark Shanghai Composite Index, even with A-Shares set to

receive broader inclusion in the MSCI global indices, albeit in a tiered manner.

     The recent run higher in equities could hold deeper monetary policy

implications; surging Chinese stocks could constrain opportunities for the

People's Bank of China to further ease policy in coming months, although any

sharp downturn in the economy may still open the way for rate cuts, Zhang Bin, a

senior fellow at the China Finance 40 Forum think tank, told MNI.

     The recent string of domestic data points to some underlying strength in

the domestic economy, although whether that is owing to recent simulative

measures employed, and the scope for the longevity of any upturn are separate

matters that are up for discussion. Softer industrial profits continue to

provide an obvious area of weakness, which could crimp investment in the sector.

     That being said, the latest Caixin manufacturing PMI survey suggested that

"overall, with the early issuances of local governments' special-purpose bonds

and targeted adjustments to monetary policy, the situation in the manufacturing

sector recovered markedly in February due to the effect of increased

infrastructure investment."

     --MONEY MARKET RATES

     The decision regarding further PBOC easing may not rely solely on the

equity market; liquidity and money market matters may create some headwinds for

the Bank. 

     China's interbank market rates fell sharply Friday, weighed by an abundance

of surplus funds as recent cash drains on the system start to dissipate.

     MNI contacts suggested that demand for liquidity moderated as the seasonal

effects of tax payments and the Spring Festival slow, while fiscal easing

continues to promote an underlying supply of liquidity.

     One analyst suggested "since the money market rates are lower than their

relevant policy rates, the central bank could consider cutting policy rates as

early as the second quarter when the economy is expected to face headwinds and

the Federal Reserves may suspend rate hikes."

--MNI London Bureau; +44 203 865 380; email: anthony.barton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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