European stocks rebounded today as the People’s Bank of China cut interest rates in a new effort to shore up its slowing economic growth after another rampant sell-off in Shanghai overnight.
The central bank slashed its benchmark rate by a quarter of a per cent and cut its one-year lending rate to 4.6 per cent, and the one-year deposit rate to 1.75 per cent. This was the fifth cut in 12 months and the first rate cut since November. It takes effect immediately.
The bank also increased the amount of money available for lending by reducing the minimum reserves banks are required to hold by 0.5 percentage points. It had already lowered the Reserve Requirement Ratio once this year, in April, in a bid by policymakers to boost the economy.
Alongside the cut the central bank warned that China continued to face downward pressure. It said the cuts in the reserve requirement ratio would provide liquidity which has seen a shortfall due to “fluctuations in the foreign exchange markets”. It added that it will “closely monitor” changes in liquidity and will use “various tools” to adjust it accordingly.
European markets, which had already been moving higher in early trading, pushed on after the announcement from Beijing, with London up more than 3 per cent, while Paris and Frankfurt rose more than 4 per cent.
Advertisement
The Brent crude oil price also saw a recovery, moving 3.8 per cent higher to $44.32. It was the euro that appeared to be the biggest loser from the cut, falling 1.4 per cent against the dollar to $1.1457.
The rebound came despite a warning yesterday from George Osborne that Britain’s “very open economy” would be particularly vulnerable to global market shocks. He said that this was a reminder that Britain was not immune from the “next crisis” and a reason for the country to get its “house in order”.
“Britain is a very open economy, we’re probably the most open of the world’s largest economies,” the chancellor said during a visit to Helsinki. “And so we are affected by what happens, whether it’s problems in the eurozone, problems in Asian financial markets.”
The rise in European bourses followed yet another night of volatile trading in Asia, which saw Chinese shares plunge yet again.
Shanghai’s composite index fell 7.6 per cent, after an 8.5 per cent tumble on Monday, a total decline in the last three trading days of 15 per cent. But Japan’s Nikkei rose in early afternoon trading after falling at one point to its lowest level in six months. The smaller Shenzhen shed 7.2 per cent.
Advertisement
But there were signs of recovery in other Asian markets, after panic selling across the world on Monday raised fears of a new financial crisis.
Hong Kong rose as much as 2.6 per cent, in a further sign that international markets may be looking past the increasingly vulnerable looking Chinese economy to find positive signs elsewhere. It eventually closed 0.7 per cent higher, breaking a seven-day losing streak.
Australia had a similar morning of wild volatility, sinking 1.5 per cent, but ending the morning up 2.7 per cent, recovering more than half of Monday’s 4.1 per cent drop. Early in the session, the benchmark briefly dipped below 5,000 for the first time in two years. New Zealand stocks also erased early losses to close slightly higher.
“China is and has always been a risk. This risk has now come to the forefront,” said Rie Shigekawa, of Fidelity Worldwide Investment in Tokyo. “But while downside risks are likely to persist for the time being, the Japanese market is in a consolidation phase rather than a free fall.”
Despite direct intervention from the Chinese government and a ban on selling by large investors, shares have shed $4.5 trillion in value since June. The central bank’s decision to allow the devaluation of the yuan has helped Chinese exporters, but alarmed those countries in the region for whom China is a crucial market for commodities and manufactured goods.
Advertisement
This morning’s markets offered respite from fears of a currency war of competitive devaluations. Most Asian currencies marked moderate increases, with the Australian dollar up just under 9 per cent, the Korean half a per cent, and the New Zealand dollar 0.4 per cent,
The yen, regarded as a haven of stability in volatile markets, has risen sharply, threatening Japanese exports. This morning it fell 1.4 per cent to the relief of the government.
Commodities such as copper, and crude oil, which are all dependent on Chinese demand, also edged up after sharp losses the day before. Brent crude was up 56 cents at $43.25 a barrel.
“The recent turmoil has left even the most hardened trader gasping for air” said Frederic Neumann of HSBC. “And there’s probably more to come.
“China’s economy continues to slow and the Fed may still hike rates before the end of the year. That puts further cracks into the two main growth pillars for the world economy of recent years: Chinese demand (including commodities) and easy money.”
Advertisement
“Recent economic and FX weakness in China and other emerging markets will not tip the global economy into recession,” Goldman Sachs said in an analysis. “[But] we see a meaningful risk that markets are over-interpreting the collapse of oil and commodity prices as a negative growth signal.”