China stocks up on lending rule change

asia stock marketCHINA stocks rose for the third straight day on Thursday as banking heavyweights gained on Beijing’s decision to abolish lenders’ debt-to-loan ratio, and as the central bank moved to increase short-term liquidity.

But Hong Kong shares lost ground, dragged down by gloomy global markets as negotiations between Greece and its creditors stumbled, dashing hopes for a last-minute bailout deal.

By midday, the CSI300 index rose 0.6 percent to 4,907.1 points, while the Shanghai Composite Index gained 0.4 percent to 4,710.5.

The CSI300 Bank Index climbed 1.4 percent after China said late on Wednesday that it was scrapping rules which currently prohibit commercial lenders from lending more than 75 percent of their deposits.

Removal of the debt-to-loan ratios (LDRs) would potentially allow 16 listed banks to release up to 6.6 trillion yuan ($1.1 trillion) in extra lending, some analysts estimate. That should in theory give an extra fillip to the slowing economy, though banking sources have told Reuters that loan demand is weak as companies struggle with sluggish sales and are in no mood to make fresh investments.

“In the long term, we believe this relaxation will reduce banks’ needs to compete fiercely for deposits as they did before, so banks could have better control over their funding costs,” Barclays said in a research note, adding that banks with higher LDRs could benefit more.

Smaller banks, such as Bank of Ningbo and Bank of Nanjing outperformed state-owned banking giants such as ICBC.

Market sentiment was also lifted as the People’s Bank of China said on Thursday it will moderately increase short-term liquidity in the banking system through issuing reverse repos to stabilise market expectations. Money market rates fell after the move.

Last week’s stock market plunge was partly caused by liquidity fears as regulators stepped up tightening of margin financing and the pace of initial public offerings. Late on Wednesday, China’s securities regulator approved a new batch of 28 IPOs.

Although the market appears to have stabilised this week, HSBC cautioned that the consolidation will likely continue in the near-term as the leverage-driven rally cools.

Outstanding margin loans on Chinese stocks shrank for the first time in two weeks and the pace of new investors entering the market slowed, the latest weekly data showed.

Real estate stocks were very strong on Thursday morning as some investors bet additional lending made possible by the scrapping of LDRs would go to t

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