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China rate cut shocks market

China’s central bank surprised markets by unexpectedly cutting interest rates for the second time in two months. Benchmark lending rates have been lowered by 31 basis points to 6 per cent, whilst deposit rates will be cut by 25 basis points to 3 per cent, says Liz Evans (pictured), Senior Investment Director and Manager of the Cavendish Asia Pacific Fund…

Whilst a second rate cut was widely expected later this year, few imagined it would come so early. The surprise timing may well be an attempt to deflect attention from the Q2 GDP figure, which is expected to disappoint and come in well under 8 per cent, perhaps down as far as 7.5 per cent.
Regardless of the motivation it sends a clear signal to markets. Many investors were expecting the Government to cut RRR first as part of a ‘softly, softly’ approach; that it has instead opted for a stronger approach at this stage is telling of the level of concern amongst policy-makers regarding China’s slowdown.
“Nonetheless the move is welcome, and if anything overdue. We already knew that China’s tightening phase was over, now we know for sure that a concerted programme of easing is being put into place. Given ongoing problems in the Eurozone and the recent faltering of the US recovery, this move is prudent and timely not just for China and Asia, but the global economy.

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