The People’s Bank of China has lowered its interest rate for the fifth time since November boosting European stocks higher in afternoon trading. The one-year lending rate has been reduced by 25 basis points to 4.6%, which is record low for China, according to Bloomberg.
Lu Ting, chief economist at Huatai Securities Co. said the following:
The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy (…)
Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.
The decision by the central bank immediately sent European stocks higher. Earlier today:
- London’s FTSE was up 3%,
- the German DAX and France’s CAC were gaining 4.5%
- and Russia’s RTS was 5.75% higher.
The rate cut comes at the moment of the biggest 4-day plunge by the key Shanghai Composite Index in the last 20 years as Chinese stocks have lost 22% since August 19.
Liu Li-Gang, China economist at ANZ Bank in Hong Kong thinks that the action from Beijing was targeted more at the real economy.
Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its seven percent growth rate fulfilled.