October 19, 2018 / 6:29 AM / a month ago

China shares bounce despite weak 3Q GDP as regulators pledge support

* SSEC +2.33 pct, CSI300 +2.73 pct, HSI +1.1 pct

* PBOC chief downplays stock market fluctuations

* CSRC chief says will encourage funds to support companies facing liquidity problems

* China Q3 GDP growth slowest since Q1 2009

SHANGHAI, Oct 19 (Reuters) - Chinese stocks bounced on Friday, erasing losses from the past two sessions after regulators pledged steps aimed at calming markets and supporting struggling firms, as Beijing moved quickly to mitigate rising risks to the economy.

Official data earlier in the day underscored weakness in the economy amid a worsening trade war with the United States. Gross domestic product grew 6.5 percent year-on-year in the third quarter, below expectations and the weakest quarterly pace since the first quarter of 2009,

With less than hour left in the trading day, the CSI300 index was up about 2.7 percent and the Shanghai Composite index was up 2.3 percent after dipping to near four-year lows.

Chinese stocks have slumped around 10 percent so far this month as foreign investors and domestic institutions dumped shares amid concern about rising U.S. Treasury yields and risks to the world’s second largest economy, and as worries rose over the prospect of forced margin calls.

“The recent sharp downward correction in the stock market is possibly drawing to an end,” said Chen Xiaopeng, an analyst with Sealand Securties.

Zhang Qi, Shanghai-based analyst at Haitong Securities, said cheap stocks could help buoy the market.

“Valuations are very low right now, even compared to other bear markets historically. It makes sense that there is some support now,” he said.

In a move to instil investor confidence, the governor of the People’s Bank of China said on Friday that China’s current equity valuations were not in line with sound economic fundamentals, and that the bank would enact targeted measures to help ease firms’ financing problems and encourage commercial banks to boost lending to private firms.

In a statement on its website on Friday morning, China’s securities regulator quoted its chief as saying it would encourage funds to help resolve liquidity difficulties at listed companies caused by stock pledging, and speed up approval for mergers and acquisitions as part of efforts to boost market confidence.

Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), also said the regulator will support the issuance of high-yield bonds and other debt products by small and medium-sized companies.

Zhang at Haitong Securities said that while the policy statements were good for sentiment, it may take a few rounds of support before confidence is fully restored, as was the case during the 2015 market rout.

The comments from regulators came ahead of the release of China’s GDP figures, which showed the economy grew 6.5 percent year-on-year in the third quarter, below expectations and its weakest pace since the first quarter of 2009, amid a worsening trade war with the United States.

“Chinese policymakers are faced with a tough proposition – keep pumping liquidity into the system for limited dividend and growing long-term imbalances or accept much slower growth and refocus on deleveraging,” Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong said in a note.

In Hong Kong, the Hang Seng index had a volatile morning, but was up about 1 percent in afternoon trade, while the Hong Kong China Enterprises Index rose 1.7 percent.

China’s yuan edged up against the U.S. dollar on Friday but was still set for a weekly loss.

The People’s Bank of China set the midpoint rate at 6.9387 per dollar, 0.16 percent weaker than the previous day’s fix and the lowest level since Jan.4, 2017.

Recent rapid losses in the yuan have prompted increasing speculation on whether the currency would breach the psychologically critical 7 per dollar level soon, given the local currency is facing a double whammy of depreciation pressure amid rising China-U.S. trade tensions and signs of slowing economy.

The yuan opened at 6.9391 per dollar and was changing hands at 6.9339 as of 0600 GMT.

Despite the yuan strength on Friday, Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said the currency would continue to face depreciation pressure due to divergence in monetary policy between the United States and China.

“The market will slowly drag the yuan lower to 7 per dollar to test the central bank’s bottom line,” he said. “The PBOC is likely to allow the yuan depreciate in an orderly manner as long as expectations are stable.”

Reporting by Andrew Galbraith, Winni Zhou and Liu Luoyan in SHANGHAI, and Noah Sin in HONG KONG Writing by John Ruwitch Editing by Sam Holmes & Shri Navaratnam

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