Chinese Stocks Decline Despite Aggressive Banking Move To Revitalize Troubled Property Sector

Chinese stocks trading in the U.S. market witnessed a notable decline on Tuesday, even as the People’s Bank of China (PBoC) took steps to bolster its faltering real estate sector.

What Happened: The bank cut the five-year prime loan rate by 25 basis points to 3.95% on Tuesday, surpassing expectations of a modest 15 basis points reduction.

This marks the most substantial rate cut since the introduction of the five-year loan prime rate in 2019. It also represents the first-rate reduction since June 2023.

China maintains the one-year rate at 3.45%, contrary to the anticipated 15 basis points decrease, setting both rates at historical lows.

Why It Matters: Beijing’s reducing interest rates and releasing more liquidity are an attempt at revitalizing the real estate sector.

Recall how Evergrande defaulted in 2021. The collapse led to a cash crisis across China's real estate sector. Today, Evergrande has over $300 billion in liabilities.

China's southern province of Hainan recently reduced the down-payment ratio for first-time homebuyers from 25% to 20%.

Market Reaction: The iShares China Large-Cap ETF FXI experienced a decrease of 0.8%. The iShares MSCI Hong Kong ETF EWH saw a reduction of 1%. Among individual stocks, e-commerce giant JD.com Inc. experienced the most significant drop, declining by 4.4%.

Electric vehicle company Nio Inc. NIO also faced a substantial decrease of 3.8%, reflecting broader market pessimism towards EV manufacturers.

Other prominent Chinese companies, including Baidu Inc. BIDU, Alibaba Group Holding Ltd. BABA, and PDD Holdings Inc. PDD, also encountered declines.

The downturn in Chinese equities was partly attributed to the broader negative trends impacting U.S. tech stocks Tuesday. Nvidia Corp. NVDA experienced a more than 5% drop ahead of its earnings release, prompting investors to reassess high valuations.

The Federal Open Market Committee (FOMC) minutes on Wednesday and forthcoming remarks from Federal Reserve officials are expected to provide clues on the potential timeline for U.S. interest rate reductions.

Currently, money markets are leaning towards a cumulative rate cut of one percentage point in 2024. The expectation is for four quarter-point reductions. That’s a revision from the previously anticipated five cuts before a recent hotter-than-expected inflation report.

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