China's stock market on tenterhooks as crisis looms

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China's stock market on tenterhooks as crisis looms

Bloomberg - Investors seeking hints about how Beijing plans to deal with the China Evergrande Group s debt crisis are training their crosshairs on the central bank s liquidity management.

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The People's Bank of China will resume daily open-market operations Wednesday after a holiday break, and a large net injection could signal Beijing s intent to reduce systemic stress after the Evergrande crisis roiled global equities. On the other hand, on the other hand, if the PBOC withdraws funds, that could mean it was prepared to tolerate higher market volatility as the developer moves closer to a default.

The need to calm market jitters may be even more pressing if offshore stocks go flat at the resume of trade Wednesday as they catch up with losses made mainland. The Hang Seng China Enterprises IndexChina Enterprises Index, a gauge of Chinese equities traded in Hong Kong, slumped more than 3% when China was shut Monday and Tuesday, even as Wall Street analysts sought to reassure investors that Evergrande won't lead to a Lehman moment.

China has left the market on tenterhooks, said Zhou Hao, senior economist at Commerzbank AG in Singapore. Traders can t figure out how Beijing s thoughts on the Evergrande crisis will be resolved and how weak the economy is allowed to be. The PBOC will continue to inject adequate short-term liquidity to provide sufficient cash supply. Uncertainty over how financial problems at China s largest property developer - with $300 billion of liabilities to be resolved - has swelled as the authorities have refused from providing any public assurances on a state-led resolution. The isolated media commentary has shunned the subject, except a tabloid which said Evergrande was an official case. China s slowing economy has compounded investor angst.

Still, while Hong Kong stock markets may follow the rout in mainland Hong Kong stocks on Wednesday, many analysts - including those at Citigroup Inc. Barclays Plc and UBS Group AG - say the Evergrande crisis isn t likely to be the country s Lehman Moment. The PBOC has at least moved in the right direction, raising cash injections to the highest since February last week and then increasing it till 2012. The central bank will need to add a total of 130 billion yuan 20 billion Wednesday to ensure liquidity matches Saturday's level.

China cash operations have been aimed at striking a balance between increasing growth hurt by fresh virus outbreaks and tighter regulations, while preventing asset bubbles. Authorities also tend to loosen their grip on liquidity toward the quarter-end due to higher demand for cash from banks for regulatory checks. Lenders also need to hoard more funds ahead of the one week holiday at the beginning of October.

Just boosting liquidity won t be enough to solve the Evergrande crisis by itself, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered plc in Hong Kong.

What the market hopes government will do is to come up with a plan that can help the company refinance and restructure in a smooth way, he said. China s bottom line is that it won t allow the Evergrande issue to turn into a full-fledged financial crisis or let it trigger any systemic risks. Evergrande was unable to report outstanding interest payments on one or two of its largest bank creditors the same day, people familiar with the matter said, asking not to be identified discussing private information. Some $83.5 million in interest on a five-year note sold by the firm will mature Thursday, and failure to pay within 30 days could constitute a default. The company also needs to pay a 232 million yuan coupon on an onshore bond the same day.

Commercial banks will announce the latest benchmark loan rate on Wednesday, although analysts expect the one-year rate to be kept unchanged at 3.85%.

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