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Financials

China stocks slip on slowdown fears despite surprise rate cuts

(Updates to market close)

SHANGHAI, Aug 15 (Reuters) - China stocks slipped on growth concerns on Monday after data showed economic activities and credit expansion slowed sharply in July even as the central bank unexpectedly cut key rates to support the COVID-19 hit economy.

The CSI300 index closed down 0.1% while the Shanghai Composite Index ended almost flat.

Some growth-oriented stocks, however, gained from lower rates, with the new energy sub-index surging more than 3%.

The People’s Bank of China (PBOC) on Monday lowered the rate on one-year medium-term lending facility (MLF) loans to 2.75% from 2.85% and the seven-day reverse repos rate to 2% from 2.1%.

“The 10 bps MLF rate cut today was a totally unexpected move,” said Kaiwen Wang, China strategist at Clocktower Group.

“The move reflects that policymakers were shocked by the July credit data as well as a comprehensive deceleration in economic activities.

China’s activity indicators from industrial output to retail sales missed forecasts, adding to slowdown concerns as new bank lending tumbled more than expected and broad credit growth slowed.

“Economic activities weakened in July. Domestic demand softened due to COVID outbreaks in many cities and the worsening sentiment in the property market,” said Zhiwei Zhang, Chief Economist at Pinpoint Asset Management.

Several Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures after fresh outbreaks of the more transmissible Omicron variant were found, casting doubts on a strong economic rebound.

The unexpected rate cuts soothed some worries in the stock market about the exit of crisis-mode monetary easing, with the blue-chip CSI300 jumping as much as 0.7% in early morning trade before gains were erased.

“The rate cut is likely to assuage the market concern that Beijing may start to tighten liquidity on the margin. As such, the growth-oriented stock rebound may be prolonged, while demand weakness will continue to weigh on blue-chip, value names,” Clocktower’s Wang said.

Shares in new energy companies soared, with photovoltaic firms jumping 4.2%, while new energy vehicles added 2.5%.

However, financials and consumer staples both retreated 1%, while tourism-related firms dropped 1.2%.

Jing Liu, HSBC’S Greater China Chief Economist said a spike in COVID-19 cases coupled with a continued housing market slowdown are the strongest headwinds to China’s economic growth now.

“More proactive fiscal policy, continuously accommodative monetary policy as well as regulatory policy fine-tuning are needed,” she said in a note.

Data on Monday also showed Chinese developers in “survival mode” sharply cut property investment in July while new construction starts suffered their biggest fall in nearly a decade.

In Hong Kong, the Hang Seng index dropped 0.7%, while the Hong Kong China Enterprises Index lost 0.6%.

Tech giants listed in Hong Kong slipped 1%, after five U.S.-listed Chinese state-owned enterprises (SOEs) whose audits are under scrutiny by the U.S. securities regulator said on Friday they would voluntarily delist from New York.

Beijing and Washington are in talks to resolve a long-running audit dispute which could result in Chinese companies being banned from U.S. exchanges if China does not comply with Washington’s demand for complete access to the books of U.S.-listed Chinese companies.

Some analysts said the delistings of SOEs were not totally unexpected, and they believed the delistings could potentially help pave the way for an audit deal.

“As for private enterprises listed in the U.S., whether they may be allowed more discretion to cooperate with the Public Company Accounting Oversight Board (PCAOB) audit inspection will probably depend on the sensitivity of data in their audit papers,” said Weiheng Chen, partner and head of Greater China Practice at Wilson Sonsini. (Reporting by Jason Xue and Brenda Goh; Editing by Jacqueline Wong)

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