Stock investors are all smiles at a securities brokerage in Nantong, Jiangsu province, on Nov 24. The benchmark Shanghai Composite Index rose by 1.85 percent to close at 2532.88 points. [Xu Congjun / China Daily]

Analysts skeptical on whether move will result in a stronger market over long term

Share prices rallied to a three-year high in the Chinese mainland on Monday after the central bank cut interest rate, but doubts still remain on whether it would be enough to bolster market liquidity and sustain the bullish trend, analysts said.

The property and non-banking financial sectors led the surge as the benchmark Shanghai Composite Index rose by 1.85 percent to close at 2532.88 points.

Trading value easily exceeded 100 billion yuan ($16.3 billion) in 30 minutes after trading began on Monday, reflecting a cheerful market response to the central bank's move to lower benchmark interest rates to shore up the economy.

The rate cut, which lowered lending rate by 40 basis points to 5.6 percent and the deposit rate by 25 basis points to 2.75 percent, was seen as a timely move to bolster market sentiment, which began to weaken on concerns of policymakers' reluctance to loosen monetary control even as most of the indicators pointed to a significant economic slowdown.

"The market will likely read it as a positive signal that the government is responding to worsening private demand and rising deflation risks and is finally willing to send a strong signal to the market," said Chang Jian, chief China economist at Barclays Plc.

Most economists interpreted the rate cut as the beginning of a loosened monetary era in China and most of them anticipate more cuts in benchmark interest rates and banks' reserve requirement ratio to come in the fourth quarter and early next year.

"If the central bank continues to do as expected, China will undoubtedly enter a period of abundant liquidity, which is a very positive message for the stock market, especially for the big caps," said Li Huiyong, a researcher at Shenyin & Wanguo Securities Co.

On Monday, equity prices in Hong Kong also jumped as Hang Seng Index gained 1.95 percent and the Hang Seng China Enterprises Index outperformed the main index, up by 3.79 percent.

Analysts said capital-sensitive and highly leveraged industries, such as the real estate sector, will be the biggest beneficiaries from the rate cut while the banking sector would see a negative impact on earnings because of the asymmetrical nature of the rate cut.

"We expect the sector (property) to rebound in anticipation of further monetary loosening, until proven otherwise," Du Jinsong, an analyst with Credit Suisse, wrote in a note.

But some analysts were uncertain over whether the current bull run would last as it is unclear how much of the benefits from the rate cut will get passed on to the real economy as Chinese banks are facing a squeeze in the interest rate margin and could be unwilling to lower the lending rates, which are already market-based.

Some investors are also hesitant on taking long positions as they are still digesting the seemingly confusing message of the central bank, which said the rate cut is a neutral operation and does not mean a shift in the monetary stance.

Nonetheless, most strategists are expecting continuous gains in the A-share market at least in the short term due to the strong correlation between stock prices and interest-rate changes in China.

In October 2008, the central bank lowered the benchmark interest rates to pump up the economy during the global financial crisis, which eventually led to an eight-month bull run of the A-share market.