CHINA MARKETS-Chinese stocks fall as rate rise reality sets in

* Chinese shares fall 1.9 pct after being up much of day

* Financials, property companies fall

* Expectations grow China could use yuan in inflation fight

* NDFs imply slightly faster appreciation in next year

* Bond yields basically flat as tightening was expected

By Jason Subler and Lu Jianxin

SHANGHAI, Dec 27 (BestGrowthStock) – Chinese investors went from
relief to apprehension of more tightening ahead on Monday
after the central bank’s surprise Christmas Day interest rate
rise, pushing the stock market down 1.9 percent after earlier
gains.

The 25-basis-point increase in benchmark lending and
deposit rates by the People’s Bank of China (PBOC) came
somewhat earlier than many investors had expected, suggesting
authorities may be front-loading their tightening measures and
triggering speculation that yuan strength may be employed to
fight price pressures.

Stock market punters initially piled into sectors seen as
potentially benefiting from higher interest rates, including
banks and insurers, but those bets reversed in the last hour
of trade, while offshore yuan forwards reflected expectations
for greater appreciation in coming months.

The benchmark Shanghai Composite Index ended up
closing at 2,781.4 points, easily below the 250-day moving
average, a closely watched technical level in the Chinese
market.

“There was intense stir-frying in the morning,” said Chen
Shaodan, an analyst at China Development Bank Securities in
Beijing, using a Chinese phrase to describe speculation.

“But the market did not show an increase in turnover in
the morning rally, so together with weak sentiment amid
concern over further tightening, there was little else to be
expected other than a reversal of the trend in the afternoon.”

The yuan fell slightly in the spot market, but
non-deliverable forwards moved to imply more appreciation in
three months and a year’s time.

One-year dollar-yuan non-deliverable forwards (NDFs)
fell to 6.4750 bid on Monday from Friday’s close
of 6.500, with implied yuan appreciation in a year’s time
rising to 2.4 percent from 2.0 percent shown on Friday.

Three-month NDFs edged down to 6.5890 bid
from Friday’s close of 6.6010.

ZIG-ZAGGING TRADE

Mid-sized banks and property firms, among investors’
favourite policy outlook plays, led the zig-zagging trade.

China Everbright Bank , the most active stock
of the day, closed down 3.7 percent after rising 2.5 percent
at one point in the day. Property firm China Vanke
dropped 2.9 percent, after having risen 1.7 percent in the
early afternoon.

Despite the overall fall in the market, some companies
rose on relief that prices for metals such as copper did not
fall too sharply on the rate hike.

Jiangxi Copper , the country’s top copper
producer, rose 1.1 percent on the day.

Many economists viewed the latest rate rise — the second
in just over two months and following a number of increases in
banks’ required reserves — as a positive for the economy and
corporate results in the long term as it could help keep
inflation from getting out of hand.

Still, analysts said that the jury was still out on the
stock market’s direction in the medium term, as tighter
monetary policy could bite into companies’ margins.

“The market dropped more than we expected, with the only
reason being that the market is short of liquidity toward
year-end,” said Lu Yi, managing director of hedge fund
Shanghai Qide Investment.

“The mid-term outlook of the market is not optimistic, as
China faces the risk of stagflation — characterised by high
inflation and stagnant economic growth,” Lu said.

HOPE ON YUAN

Investors will also be watching closely for signs of
whether the PBOC appears set to let the yuan strengthen more
quickly in the coming months as another weapon in the fight
against inflation, which hit a 28-month high of 5.1 percent in
November.

The yuan fell slightly against the dollar,
closing at 6.6308 per dollar, compared with Friday’s close of
6.6270.

However, some analysts took the fact that the central bank
set the day’s mid-point higher than last Friday, at
6.6305 per dollar, as a sign that the PBOC could be ready to
tolerate further appreciation after letting it strengthen by
0.9 percent against the dollar over the past week.

While NDFs imply appreciation of 2.4 percent in a year’s
time, many forex dealers in the onshore market think it could
gain significantly more than that.

“Letting the yuan rise right after a monetary tightening
step is a rare phenomenon, as the government typically hopes
to curb speculation of yuan appreciation right after such a
step,” said a senior trader at a major Asian bank in Shanghai.

“The government appears thus to be giving a signal that it
will use both interest rates and the exchange rate to fight
against inflation, including imported inflation.”

Domestic bond yields rose slightly, given the market had
already priced in a number of interest rate rises over the
coming year in the wake of the first rate rise in October.

The benchmark five-year government bond yield
rose 5 basis point to 3.60 percent, while that for the 10-year
tenor rose 9 bp to 3.90 percent.
($1 = 6.63 yuan)
(Additional reporting by Chen Yixin and Samuel Shen)

(Editing by Kevin Plumberg)

CHINA MARKETS-Chinese stocks fall as rate rise reality sets in