Chinese stocks drop as policy measures disappoint, but yuan rally halted

China's latest effort to steady its sliding stock market struggled for traction on Tuesday, with AI-related shares leading the losses as investors said the financial measures were inadequate.

The yuan posted its biggest single-day drop in more than five months on Tuesday after ‌the central bank moved to tighten onshore dollar liquidity to slow the Chinese currency's rapid appreciation. China's blue-chip CSI300 Index and the benchmark Shanghai Composite Index both dropped more than 1% in early trade, before paring losses to 0.1% and 0.7%, respectively, by midday.

China is the weakest-performing major stock market globally this year, with the CSI300 down 13.5% since January. The index notched ‌its largest monthly fall for a decade in October, led by a slump in AI stocks. Fund manager Chen Jiande said these measures — including central bank relending and ‌swap operations to fund stock purchases by brokers, fund managers and listed companies — are merely dusting off an old playbook, and will not be enough to stem the market slide.

"These measures were below expectations," and had been priced in by Monday's market rebound, said Chen, general manager at Fujian Tianlang Asset Management Co. "Many investors in battered tech shares are taking advantage of any rebound to rush out."

The STAR Chip Index tumbled ⁠nearly 4% ​by midday, while the AI index dropped more ⁠than 2%. "The incremental policy was already reflected in yesterday's respite," said Wang Yapei, fund manager at Zijie Private Fund.

One issue is that the government is prodding market participants to shell out the money, rather ⁠than providing the funding, he added. Under the announced schemes, market participants obtain liquidity from the central bank via swaps or relending to buy shares.

"Major shareholders may not have a strong incentive to buy sliding ​shares with borrowed money, as they need to take the risks themselves," Wang said. "The problem now is that there's an absence of faith in the market. ⁠Once faith is gone, you need continuous buying with cash to prop up prices."

In September 2024, China launched a similar stimulus package — with rate and reserve-ratio cuts — that kicked off a two-year slow bull run. ⁠But ​this time, regulators have merely fine-tuned the facilities, analysts said. Some were more optimistic.

JPMorgan said in a note that the announcement is "a clear signal of policymakers’ intent to support the equity market", and "may help establish a floor for China equities". YUAN SLIDES

One move likely to support the brightest part of China's economy was the Chinese central bank ⁠announcing a hike to foreign currency reserve requirements, which slammed the brakes on a yuan rally that has been hurting exporters. The raising of the foreign exchange reserve requirement ratio (RRR) ⁠to 6% from 4% was aimed at ⁠tightening dollar liquidity conditions and slowing the pace of recent yuan gains, the central bank said.

The onshore yuan weakened roughly 0.3% on Tuesday, the biggest drop against the dollar since May 15. The move would be a policy reversal of the PBOC's decision in September ‌2023 to lower the ‌FX RRR, which was a move to stem the yuan's rapid losses and capital ​outflows.