While this blogger was on vacation for the Christmas break, the Shanghai stock market rallied to this year's high even as news came that China's industrial profits dropped 4.2% from a year earlier, the steepest decline since August 2012. The Shanghai Composite Index closed at 3,308 on Friday.
This is curious phenomenon. Macro industrial profits data is loosely correlated with corporate earnings. Why should the equity market rally when the earnings are trending down?
This is because there are more talks of monetary easing from the People's Bank of China last week. According to the Chinese language China Business News, on Christmas Eve, China's central bank met with 24 major financial institutions, soliciting their views on what kind of deposits should to be included when calculating loan-to-deposit ratios.
Over the weekend, Reuters reported starting next year the People's Bank of China would indeed change rules governing the calculation of loan-to-deposit ratios, "according to a copy of a central bank document seen by Reuters." The central bank will include savings held by banks for non-deposit taking financial institutions in banks' deposits, which expands the base for calculating the ratios and means banks can issue more loans. Currently, Chinese banks are allowed to lend up to 75% of their deposits.
China's central bank is likely to loosen its grip further, noted Nomura Securities' Chang Chun Hua and team. Just look at China's 7-day bank repo rates. The repo rates rose sharply in the last few weeks, from 3.7% on December 15 to a peak of 6.5% on December 22, but declined to 4.5% on Christmas Day, a sign that the central bank intervened in the inter-bank short-term loan market. "We believe that the action above is indicative of the PBoC"s loosening bias," noted Nomura analysts.
Not surprisingly, the Shanghai rally propelled U.S.-listed A-Share ETFs even higher. The Deutsche X-trackers Harvest 300 CSI China A-Shares Fund ( ASHR) rallied 6.8% on Friday after the Christmas Day holiday. The Market Vectors China ETF ( PEK) jumped 6.6%.
(END) Dow Jones Newswires
December 28, 2014 20:37 ET (01:37 GMT)
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