Chinese shares crash for the 2nd day, central bank cuts rates

Chinese stocks had another nightmarish day today amid continued slowdown in the world's second largest economy, prompting the central bank to cut the reserve requirement ratio and key interest rates to halt the slide that has devastated markets in India and other countries.

The benchmark Shanghai Composite Index fell 7.63 per cent to 2,964.97 points, following the 8.49-per cent loss in its worst daily slump since February 2007.

The Shenzhen Component Index lost 7.04 per cent to close at 10,197.94 points.

Nearly 2,000 shares fell by the 10-per cent daily limit, including even Sinopec and PetroChina -- two heavyweight shares that have long acted as a kind of market ballast, stabilising the market in times of crisis.

A further slide in the country's ailing stock markets prompted the People's Bank of China (PBOC), the central bank, to cut the reserve requirement ratio (RRR) and lower key interest rates.

From September 6, PBOC will cut the RRR for financial institutions by 50 basis points. The RRR for financial leasing companies and auto financing companies will be lowered by 300 basis points, the PBOC said in a statement.

Benchmark interest rates will also be cut. From tomorrow, interest rates for one-year lending and deposits will be cut by 25 basis points to 4.6 per cent and 1.75 per cent respectively, the announcement said.

The losing streak in China's markets came despite the government's decision on Sunday to allow pension funds to invest in the stock market to shore up investors' confidence and stabilising the market.

Under the new guidelines, up to 30 per cent of the pension fund's net assets can be invested in stocks and equities. The fund has assets of around 2 trillion yuan (USD 326.8 billion) that could be invested, meaning up to 600 billion yuan (about USD 100 billion) could theoretically go into the stock markets.

"The scale of the funds is limited and they will enter the stock market gradually, so their short-term impact will be quite small," said Ren Zeping, an analyst with Guotai Junan Securities.

The Caixin flash China general manufacturing PMI, the earliest available indicator of manufacturing sector conditions in China, retreated to 47.1 in August, the lowest reading since March 2009.

"The continuous fall in the index in recent months indicates the economy is still bottoming out," said He Fan, chief economist at Caixin Insight Group.

Eighty per cent of China's stock market is comprised of small investors who operate independently without aid of fund managers like elsewhere in the world.

The volatility of the market which started in June diluted about USD four trillion worth of capital and forced about 20 million investors to leave the stock market after heavy losses.