Markets rally after PBOC expands pilot program to allow banks to use qualified credit assets as collateral
China's stock indexes rose sharply on Monday, sending the benchmark to a seven-week high, after the monetary authority rolled out fresh measures to stimulate the economy.
The Shanghai Composite Index jumped by 3.28 percent, or 104.51 points, to close at 3287.66 points. The Shenzhen Component Index, which tracks smaller stocks, advanced by 4 percent, while the ChiNext Index comprised by high-tech and startup companies rose by 4.52 percent.
Trading turnover in Shanghai and Shenzhen also surged, exceeding 900 billion yuan ($142.4 billion), up by 55 percent from the previous trading day.
The rallies followed the People's Bank of China's announcement over the weekend to expand a pilot program that allows banks to use qualified credit assets as collateral for refinancing.
The program, currently being implemented in Guangdong and Shandong provinces, will be expanded to nine provinces and cities including Beijing and Shanghai.
Analysts said the central bank move seemed to have sent a reassuring signal to investors that more stimulus measures to energize the slow economy were likely.
"The market rebound was a correction of previous overly pessimistic sentiment as investors appeared to be convinced China's economic reform and stimulus measures will continue," said Li Xunlei, chief economist at Haitong Securities Co.
Li said the positive market response on Monday had to do with a basket of factors, including investors' easing concerns of a substantial deprecation of the yuan, and potential large-scale capital outflows as any imminent interest rate hike by the US Federal Reserve became increasingly unlikely.
The sharp rise in the equities market also came ahead of the release of China's September economic data starting with trade and consumer price figures on Tuesday. The market will also see a wave of performance reports by listed companies for the third quarter.
Most analyst anticipate that China's overall economy will remain sluggish for the rest of the year, but the declining inflation rate will offer more policy room for an interest rate cut by the central bank, meaning that a loose monetary environment will continue.
The improved market sentiment also suggested investors were convinced the central government will continue to rein in the economic slowdown through means including infrastructure investment projects and reduced financing costs for firms.
"The central government authorities are working hard to ensure the flow of financing to investment projects, which is key to enabling heavily indebted manufacturing enterprises to continue to service their bank loans," said Tim Condon, chief Asia economist at ING Bank in a research note.
