By Kazunori Takada and Samuel Shen
SHANGHAI (Reuters) – Chinese stocks rose 3 percent on Monday in volatile conditions, boosted by property and infrastructure shares after the central bank cut interest rates for the third time in six months to support the world’s second-biggest economy.
Money rates eased to a four-year low while the yuan <CNY=CFXS> steadied after the People’s Bank of China said on Sunday it was lowering its benchmark one-year lending and deposit rates by 25 basis points, the third cut in six months, to help support an economy headed for its slowest growth in a quarter of a century.
While the rate cut had been widely expected, the move combined with a continued rally in small-caps gave investors an excuse to pick up shares which marked their biggest decline in nearly 5 years last week, analysts said.
“The timing of the rate cut is well within expectations while the depth of the cut is smaller than many had expected,” said Zhang Chen, analyst at Shanghai-based hedge fund manager Hongyi Investment.
“The market is in a consolidation period, and I don’t think the rate cut could change that pattern.”
The CSI300 index <.CSI300> of the largest listed companies in Shanghai and Shenzhen closed up 2.9 percent, while the Shanghai Composite Index <.SSEC> finished up 3 percent. The Hang Seng Index <.HSI> was up 0.7 percent as of 0730 GMT.
Trading was volatile especially in morning trade when both mainland indices shuffled between positive and negative territory.
He added that the increase in supply from initial public offerings was also weighing on the market.
The SSEC index posted its biggest weekly decline in nearly five years last week, triggered by signs of tighter regulatory scrutiny over margin lending, which has helped fuel a near doubling in China’s stock market over the past year despite a flagging economy.
A rate cut had been widely expected by the market after economic growth in the first quarter cooled to 7 percent, a level not seen since the depths of the 2008/09 global financial crisis.
In an attempt to energize the economy, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.
The monetary easing helped lift the stock market nearly 30 percent so far this year, the best performer in Asia and easily outpacing major U.S. and European indexes.
Property and infrastructure shares led the rally with their respective sub-indices gaining 2.9 percent <.CSICMREI> and 3.5 percent <.CSI300II>.
Shares on the ChiNext board <.CHINEXTC>, China’s version of the U.S. Nasdaq, were up 5.6 percent. Traders said investors were favoring ChiNext shares because they were little affected by regulator moves to tighten rules in margin trading.
“I expect to see the market continue to swing widely this week,” said Xiao Shijun, analyst at Guodu Securities in Beijing.
“The cumulative effect from rate cuts will push up share prices gradually.”
China’s money market benchmark, the weighted average of the seven-day repo rate <CN7DRP=CFXS> fell 6 basis points to 2.22 percent, its lowest since May 2012.
“The market believes the PBOC will continue monetary easing by cuts in bank required reserve ratios and interest rates, so there is potential for further falls in money market rates,” said a trader at an Asian bank in Shanghai.
“The seven-day repo rate will continue falling in the medium term, but 2 percent may be a strong support.”
China’s yuan steadied at 6.21 per dollar, little changed from Friday’s close, after the PBOC set the midpoint rate <CNY=SAEC> at 6.1132 per dollar.
(Reporting by Samuel Shen, Lu Jianxin and Shanghai Newsroom; Writing by Kazunori Takada; Editing by Eric Meijer and Jacqueline Wong)