China cut lifts markets, fuels growth fears

Added 26th October 2015

The People’s Bank of China announced its sixth rate cut of 2015, lowering interest rates for one year lending and deposits by 0.25 percentage points to 4.35% and 1.5% respectively.

China cut lifts markets, fuels growth fears

The PBOC also announced a 0.5 percentage point cut to banks’ reserve requirement ratio.

Markets around the world were lifted by the news, as many analysts have been concerned about the impact of China’s slowing growth. Shanghai ended the session up 1.3%, while the Nikkei 225 closed over 2% higher. In Europe, the FTSE was up just over 1% as of 16h00, while the Eurostoxx 50 was over 2.3% higher. The S&P was trading around 1% up as well. Much of the movement higher came from big resources stocks like Glencore and BHP Biliton, both of which were up more than 2%.

Chris Beauchamp, senior market analyst at IG said ttock markets were already feeling bullish after ECB President, Mario Draghi’s speech yesterday, but were pushed even higher by the news from China.

“While the move is a recognition that the Chinese economy is slowing, markets can apparently live with this if they believe that the PBoC is prepared to take steps to counter the weakness,” he said, adding: “Gains have been spread fairly evenly among the sectors in London, but it was not surprising to see companies with a close China connection heavily  represented at the top of the gainers; such names as Glencore, Burberry and Intercontinental Hotels all enjoyed strong bounces, while asset managers Aberdeen and Schroders also moved upwards on expectations that the fourth quarter will be much more pleasant for equities than the third.”

Xiaoyu Liu, fund manager, Asia Pacific Equities at Aviva Investors agreed that the cut can be seen as the Chinese government facing up to the real economy being under more pressure than the recently announced Q3 growth figures (6.9%) had suggested.

“The ‘Li Keqiang’ Index, which tracks the growth of bank lending, rail freight and electricity consumption, has declined sharply in the past two years and only grew 3% in the year to August. Although, not a perfect index, it offers some colour to the magnitude of the slowdown of the underlying economy,” he said.

The weak economy has affected the profitability and cash flow of many companies, he added, but pointed out: “The Government has shown that it is aware of the overcapacity problems, and understands that investment-led growth cannot continue for ever. But it wants to use these policy tools to smooth out the transition period.”

This is positive news for Chinese equities, particularly companies in the property and utility sectors where there is high financial leverage. In my view, this is neutral to negative for the banks. Although the rate cut will help with non-performing loans, it will narrow their interest rate margin.

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