PBOC cuts rates ahead of Politburo meeting

Main news

Asian stocks were mostly lower after a tough week, although Hong Kong managed to gain. Thailand was closed for Asarnha Bucha, one of the most important events in the Buddhist calendar commemorating the occasion when Buddha delivered his first sermon, according to Google.

The People’s Bank of China (PBOC) made a surprise cut to the seven-day reverse repo rate from 1.8% to 1.7%. This is the standing lending facility rate, which is a lending rate from the PBOC to banks. Separately, but equally surprising, the central bank also cut the 1- and 5-year loan prime rates (LPRs) from 3.45% to 3.35% and from 3.95% to 3.85%, respectively. The 5-year LPR determines the mortgage rate in China, which could lead to refinancing.

I clearly did not get the message that the Third Plenum was a disappointment. Instead, I highlighted the positive speech delivered at the post-plenum press conference, which was followed by a Q&A with journalists. Today’s news is no coincidence, as political support and the amplification of that support are increasing ahead of next week’s Politburo meetings, where concrete policies will be announced.

On Sunday, the CPC Central Committee issued a resolution titled “Resolution of the Communist Party of China Central Committee on Deepening Reform to Advance China’s Modernization.” “Common prosperity” was mentioned only once, marking a potential policy shift.

It is worth noting that the Chinese government has extended tariff exemptions on “certain U.S. products” until February 2025, a symbolic gesture. Meanwhile, China and the Philippines have made some progress in their dispute over South China.

I may not be the only one who noticed these positive developments. The Hang Seng and Hang Seng Tech indices gained +1.25% and +2.10% respectively, albeit on light volumes. Hong Kong was pulled higher by the most traded stocks in terms of value, namely Tencent, up +2.53% on the 5th day of strong net buying, Meituan, which gained +3.23%, energy giant CNOOC, which fell -0.24%, Alibaba, which gained +1.29% despite the Grey Lady, i.e. the New York Times, remaining gloomy with an article about a “criminal billionaire” who invested in Ant Group, and Xiaomi, which gained +4.24%. Mainland investors bought a net $472 million worth of Hong Kong-listed stocks and ETFs via Southbound Stock Connect, including Tencent and the Hong Kong Tracker ETF.

Mainland markets couldn’t advance without the help of the national team as their favorite ETFs saw normal volume while mega and large caps struggled. STAR Board, Growth Factor and Technology all outperformed due to their importance in the Third Plenum policy document. CNY was slightly lower thanks to the rate cut. Things could get interesting with the Politburo meeting next week and then Q2 financial results the week after!

The Hang Seng and Hang Seng Tech indices gained +1.25% and +2.10%, respectively, on volume down -8.41% from Friday, or 90% of the 1-year average. 313 stocks advanced while 153 declined. Main Board short turnover volume decreased -20.73% from Friday, or 97% of the 1-year average, as 19% of the volume was short turnover volume (Hong Kong-listed short turnover volume includes ETF turnover volume, which is determined by market makers’ ETF coverage). Growth outpaced value. The best-performing sectors were technology, which gained +2.81%, communication services, which gained +2.33%, and healthcare, which gained +2.31%. Meanwhile, materials fell -0.56%. The best performing subsectors were tech hardware, pharmaceuticals and software. Meanwhile, food and beverage, basic materials and business and professional services were among the worst performing subsectors. Southbound Stock Connect volumes were moderate, with mainland investors buying a net $472 million of Hong Kong-listed stocks and ETFs, including moderate net purchases of the Hong Kong Tracker ETF and Tencent.

Shanghai, Shenzhen and the STAR Board diverged to close -0.61%, -0.10% and +0.34%, respectively, on volume down -1.92% from Friday, which is 80% of the year-to-date average. 2,390 stocks advanced while 2,428 declined. Growth and small caps fell less than value and large caps. Health care and consumer discretionary were the only positive sectors, up +0.44% and +0.20%, respectively. Meanwhile, energy fell -1.98%, consumer staples fell -1.84% and materials fell -1.25%. The best-performing subsectors were power generation equipment, software and automobiles. Meanwhile, oil and gas, alcoholic beverages and energy equipment were among the worst performing subsectors. Northbound Stock Connect volumes were moderate with moderate net buying in Zijin Mining, small net buying in QFEC and Foxconn. Meanwhile, CITIC saw moderate net selling, and Zhongji Innolight and Sungrow saw small net selling. Treasury bonds rebounded. The CNY and the Asian dollar index fell against the US dollar. Copper and steel fell again.

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Last night’s performance

Last night’s exchange rates, prices and yields

• CNY for USD 7.27 vs 7.27 on Friday
• CNY for EUR 7.91 vs 7.91 on Friday
• 1-day government bond yield 1.33% vs. 1.38% on Friday
• 10-year government bond yield 2.25% 2.26% Friday
• China Development Bank 10-year bond yield: 2.31% vs. 2.33% Friday
• Copper price -0.92%
• Steel prices -0.35%