The People's Bank of China (PBoC) is "desperate" to control Shanghai's red-hot equity rally, analysts said, after the central bank slashed the reserve requirement ratio (RRR) on Sunday.
The 100 basis-point RRR cut to 18.5 percent is the biggest since 2008 and comes in response to a sharp selloff in stock futures on Friday after the China Securities Regulatory Commission (CSRC) tightened margin trading rules. The CSRC aims to cool Shanghai's stock market, which is up over 30 percent year to date at seven-year highs. Futures plunged during late trading on Friday, with the China A50 futures contract down 6 percent in New York.
"After the announcement on Friday, stock futures were looking horrible so something needed doing to put a floor under that from a short-term point of view. But everybody's going to take a look at this and say 'hold on, why are they [PBoC] overreacting so strongly?' People are going to start sensing desperation here," Paul Gambles, co-founder of MBMG Group, told CNBC on Monday.
Indeed, policy watchers were scratching their heads over the series of conflicting announcements. The PBoC is scrambling to ensure stability in China's notoriously volatile share market, said Mark Andersen, global co-head of Asset Allocation at UBS CIO Wealth Management.
"They want to see markets go up to some extent, but not out of control. With some of this margin financing, they want to see a relatively stable capital market with property prices falling so they don't mind equity prices moving up a bit to support the broader economy, but they don't want to see bubble territory," Anderson said.