What the cut in China reserve requirements mean for stocks

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Over the weekend China reduced the reserve requirements for banks by 1 percentage point, from 19.5 percent to 18.5 percent. That will allow more funds held by banks to be available for lending; estimates are it could free up 1 trillion yuan (about $160 billion).

What's not clear is how much of that money would find its way into the stock market.

This is the second time the Chinese have cut the reserve requirements this year. The People's Bank of China reduced it from 20 percent to 19.5 percent on Feb. 4.

Next up is a likely cut in interest rates. The Chinese cut the one-year lending rate on Nov. 21, 2014 by 40 basis points, from 6 percent to 5.6 percent, then again on Feb. 28 by 25 basis points, to 5.35 percent.

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That November cut, the first in more than two years, coincided with the great rally in Chinese stocks which began at the same time.

That's when the Chinese started talking aggressively about "stimulus," which is being carried out by lowering rates and reserve requirements.

So why was the Shanghai Index down 1.6 percent in China? It's likely because of the continuing fallout from last week's announcement that regulators would ban margin financing in over-the-counter stocks.

This is part of the problem: Policymakers talk stimulus, which encourages money to go into stocks, but they don't want the market to get too hot, so they pull back in other areas.