China’s central bank, the PBOC, probably holds the key to sustain the rise in the country’s equities market, according to Bank of America Merrill Lynch.
The Shanghai Composite Index rose nearly 8% at the open Monday after a string of measures that the government and the brokerages announced over the weekend. The measures include a pledge from the PBOC to provide liquidity to state-owned China Securities Finance Corp, which will in turn infuse funds to brokerages to support the stock purchases of Chinese investors.
In a note to client released Monday morning, BofA Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai wrote:
“At this stage, it doesn’t appear to us that (the) PBOC is prepared to buy stocks itself or make its commitment to provide support open-ended.”
The measures including infusing liquidity into brokerages may boost the market in the coming days, the bank said.
But..
“We assess that there is still a fairly high chance that (the) market may fall sharply again at a certain point over the next few months, unless the PBOC makes an open-ended commitment to support the market,” the note said.
Before Monday’s upbeat opening, the Shanghai Composite Index has fallen nearly 30% from its June 12 peak, roiled by the unwinding of margin loans, which funded the recent rally, and the uncertainty that hovered Greece as it negotiated for another bailout on its debts with creditors.
BofA Merrill Lynch said there is a downside to the PBOC’s financial support for the equities market:
“If (the) PBOC becomes the main source of market-supporting liquidity, we expect the central bank’s credibility to be hurt and the Rmb (renminbi) may come under pressure.”
The PBOC, at this point, can’t afford to have its credibility dented when it is seeking for the inclusion of the renminbi in the IMF’s basket of currencies composed of the dollar, the yen, the euro and the sterling. The IMF is set to decide on this matter later this year.
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