China’s central bank today (Aug 25) cut interest rates and lowered the amount of reserves the country’s banks must hold, cranking up support for a stuttering economy and a plummeting stock market that has sent shockwaves around the globe.
While it is clear China is undergoing a significant fall in sharemarket prices – the Shanghai Composite, China’s benchmark index, is down 40 per cent since June 12 and continued to fall sharply yesterday – it seems equally clear that global markets have overreacted to what is taking place. The risk of capital outflows and tighter liquidity after China devalued its currency on August. 11, weaker-than-forecast economic readings, and a 22 percent stock market plunge over four days added pressure for more stimulus.
In other words, we have a lot more work to do before this normalizes. What authorities don’t want to do is encourage people to build more capacity to borrow cheaply.
China has already taken several steps to control the crisis. The central bank also emphasized that inflation remains low and the cut in reserve requirement ratios will alleviate the shortfall in liquidity caused by the foreign exchange market moves. But other analysts argued the move was primarily created to support the Chinese economy, rather than the country’s stock market.
The FTSE was up 190 points, or 3.2 per cent, at 6,089 at noon and the Frankfurt Dax and Paris Cac were both up 4.5 per cent. In New York, the Dow Jones was expected to rise more than 450 points after the opening bell.
Wall Street followed global losses overnight, with the S&P 500 closing Monday’s trading session 3.9% down at 1,893, entering correction territory.
However, the Government intervention may not be over.
“In China, the reserve requirement plays a different role than it does in the U.S. and Europe. But ultimately, fixing the economy is more important than fixing the stock market and advancing reforms is critical”.
Rob Subbaraman, an economist at Nomura Securities, said: “It would appear that China’s structural headwinds, including overcapacity and over-leverage, are once again wearing on growth“.
Fidelity Worldwide Investment global economist Anna Stupnytska says the current state of the economy is “certainly not consistent with this year’s growth target” as well as not being consistent with the labour market stability.
The untapped policy potential could put China at the top of the list of economies able to pull themselves out of deflation, without engaging in “beggar-thy-neighbor” competitive devaluation, Qu said.
“We are trying to decouple but I think it’s too early to declare the worst is over…”