Chinese stocks moved higher by mid-morning on Monday in volatile conditions as an interest rate cut by the central bank failed to impress investors who are becoming increasingly worried that the recent rally has been overdone.

Money rates eased to a four-year low while the yuan steadied after the People’s Bank of China had 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.

As of 0245 GMT, the CSI300 index of the largest listed companies in Shanghai and Shenzhen was up 0.7 per cent, while the Shanghai Composite Index rose 1 per cent.

Trading was volatile with both indices shuffling between positive and negative territory.

“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.’’

He added that the increase in supply from initial public offerings was also weighing on the market.

Margin lending

The SSEC index had 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 per cent, a level not seen since the depths of the 2008/09 global financial crisis.

Rate cut, RRR easing

In an attempt to energise 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 per cent so far this year, the best performer in Asia and easily outpacing major US and European indexes.

Property shares were outperforming the market, with the CSI300 sub-index rising 1.4 per cent, while banking shares were down 1.2 per cent on concerns the latest move by the central bank to liberalise interest rates would heat up competition in the sector and put pressure on margins.

As part of structural reforms, the PBOC had lifted the ceiling for deposit rates on Sunday to 1.5 times the benchmark level, the biggest increase in the ceiling since it began to liberalise the interest rate system in 2012.

Shares on the ChiNext board, China’s version of the US Nasdaq, were up 3.5 per cent. Traders said investors were favouring 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 fell 9 basis points to 2.20 per cent, 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 per cent 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 at 6.1132 per dollar.

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