China ETFs book best day in a month after PBOC vows to support weak yuan with forex reserve ratio cut

By Isabel Wang

iShares MSCI China ETF and KraneShares CSI China Internet ETF book best day since Aug. 3

U.S. exchange-traded funds that invest in Chinese stocks notched their best day in a month after China ramped up its efforts to support the country's flagging currency as investors' concerns over the economic weakness persist.

The People's Bank of China said Friday it will lower the amount of foreign-exchange deposits financial institutions are required to hold for the first time in 2023, a move seen as a bid to shore up the Chinese yuan, which has tumbled this year as the world's second largest economy has faltered due to a property-market downturn, sluggish domestic consumption, and the ballooning local government debt pile.

The Invesco Golden Dragon China ETF PGJ, which tracks the American depositary shares of companies based in China, rose 3% on Friday, while the KraneShares CSI China Internet ETF KWEB, which offers exposure to Chinese software and information technology stocks, gained 3.5%. The iShares MSCI China ETF MCHI advanced nearly 2.2% and the SPDR S&P China ETF GXC surged 2%, according to FactSet data.

The iShares MSCI China ETF and the KraneShares CSI China Internet ETF booked their biggest daily percentage advance since August 3, according to FactSet data.

China's central bank will cut the foreign-exchange reserve requirement ratio to 4% from 6% beginning Sept. 15. The move is expected to increase the supply of foreign currencies available in local markets, making the Chinese yuan more appealing for domestic investors.

See:China's central bank to cut FX reserve ratio

Based on about $822 billion foreign-exchange deposits in July, the 200-basis-point cut in the reserve requirement ratio could release about $16 billion, which will improve the supply of the U.S. dollar onshore, and could move spot USDCNY lower, said strategists at Citigroup led by Johanna Chua, chief Asia economist.

"In a broader picture, this can be also seen as part the current round of accelerated policy rollout which works more directly on asset markets. If the accelerated pace [of policy rollout] continues, it may help stabilize sentiment to some extent and prevent outsized bearish moves on China risk assets including the RMB FX," they wrote in a Friday note.

The onshore yuan weakened around 1.7% against the dollar in August, extending its losses for the year to nearly 5%, according to FactSet data. The offshore yuan was trading at 7.27 per dollar Friday afternoon.

See:Chinese Property Stocks Gain on Stimulus Measures

Friday's change to reserve requirement ratio came a day after Chinese authorities announced that homebuyers' minimum down payment will be reduced to 20% for first-time home purchases, and 30% for second-home purchases nationwide, according to a joint statement from the People's Bank of China and National Administration of Financial Regulation late Thursday.

Currently, homebuyers in largest cities such as Beijing and Shanghai have a 30% down payment ratio for first homes, and 40% or more for second homes.

Separately, big banks, such as Industrial & Commercial Bank of China and Bank of China , have said they would cut their one-year yuan deposit rate by 10 basis points to 1.55% and their two-year yuan deposit rate by 20 basis points to 1.85%. The banks also plan to cut mortgage rates to boost consumption and aid the troubled property sector.

The broader U.S. stock market finished mostly higher on Friday as traders weighed the latest jobs report to conclude the final trading day before the Labor Day holiday weekend. The S&P 500 SPX was up 0.2%, while the Dow Jones Industrial Average DJIA advanced 0.3% but the Nasdaq Composite COMP ended nearly flat.

-Isabel Wang

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09-01-23 1629ET

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