Bank reserve cut props up confidence in stock bull run

China's liquidity injection may ratchet up investors' confidence in the Chinese stock market as its hot streak loses steam.

The People's Bank of China announced on Wednesday it would cut banks' reserve requirement ratio (RRR) by 0.5 percentage points, unleashing estimated liquidity of 600 billion yuan (96 billion U.S. dollars) into the world's second largest economy.

China is experiencing the slowest growth in 24 years as the country restructures from an investment-led to a consumption led economy.

The injection cemented some investors' confidence that the monetary policy would ease up amid the economic slowdown, providing liquidity and rationale for a bull run in the stock market despite falling industrial profit, reserved sentiment in real-economy investment and property market correction.

"The junk time is over," wrote GF Securities in a report. "The core logic is not about the amount of liquidity unleashed, rather, the cut confirms that the monetary policy is going to be eased. The easing will propel the public to transfer their assets to the stock market."

Shanghai Composite Index rose 2.2 percent on Thursday's opening after sagging most trading days in the past two weeks.

The RRR cut came at a good time to help the volatile market and drive up the index through gains on blue chips, said Yang Delong, chief strategist at China Southern Fund.

With expectations of more rate and RRR cuts in 2015, Deutsche Bank considered the medium-term upside would remain for Chinese equities.

Deutsche Bank Strategist Chang Yuliang attributed the optimism to

higher non-financial profit margins on the back of lower financial costs and potential valuation normalization amid easing domestic financial conditions.

The RRR cut was considered by some fund managers as suggesting a new round of accommodative policies in the future, since the central bank lowered the interest rates last November.

"The cut fits in the logic of a bull market," said Tebon Fund, adding the arrival of a new monetary easing round made them certain that the stock market would keep climbing.

BOCOM Schroders regards the liquidity unleashing a huge bonus for the Chinese stock market, especially benefiting the financial and real estate sectors.

Weakening growth trends suggested by the PMI decline and concerns of deflation triggered by falling oil prices prompted the market to call for more stimulus measures. But some analysts argue the lowered reserve ratio is to offset capital outflows and should not be interpreted as a sign of across-the-board easing.

UBS Chief China Economist Wang Tao does not consider the cut major monetary stimulus. She said the RRR cut was not a large net liquidity injection that would amplify China's base money supply to result in massive credit expansion.

"The RRR cut was to maintain the neutral monetary policy," said Ding Shuang, Citibank Senior China Economist. "No such action would equal squeezing the money pipe in current conditions of capital outflow and inflation downturn."

Ding expected two interest rate cuts in the first half, one in the first quarter and another in the second quarter. He said China might also lower the reserve ratio two or three times more within the year.

Not all funds expressed strong sentiment for a bull run as a wave of initial public offerings will start next Tuesday.

"The market is very likely to stay volatile in the near term," said Wang Xuelei, analyst at Shanghai Securities.