China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points.
The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%.
The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan.
The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easingby the European Central Bank president, Mario Draghi, on Thursday.
Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year.
The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%.
The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging.
Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis. The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg.
World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.
At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.
Sanjiv Shah, chief investment Officer of Sun Global Investments, said: “The Chinese decision indicates that the authorities are clearly worried about the slowdown in the pace of economic growth and have decide to engage in more pre-emptive action. The [People’s Bank of China] has cut benchmark rates and reduced banks’ reserve requirements as well as scrapping deposit controls.”
But Mark Williams, chief Asia economist at Capital Economics, remained upbeat about the prospects for China’s sustained growth, arguing that the cut in interest rates was part of a longer-term strategy and not a reaction to deteriorating growth.
“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre,” he said.
“Admittedly, we’re still waiting for clear evidence of an economic turnaround – September’s activity data still don’t show any great improvement. Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”
Corporations considered bellwethers of the global economy have also warned of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container shipping market.
The Danish conglomerate operates Maersk Line, the world’s largest container shipping company which transports roughly 20% of all goods on the busiest routes between Asia and Europe.
Source: https://www.theguardian.com
