Global Markets React in the Wake of China’s Rate Cut
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In a move that has taken the world economy by surprise, China has cut its interest rates, something that has not happened since November of 2012. In an announcement made by the People’s Bank of China, the one-year deposit rates are now lower by 25 basis points (bp) and the one-year benchmark rates of lending are lower by 40 bp.
In a move that has taken the world economy by surprise, China has cut its interest rates, something that has not happened since November of 2012. In an announcement made by the People’s Bank of China, the one-year deposit rates are now lower by 25 basis points (bp) and the one-year benchmark rates of lending are lower by 40 bp.
The sudden decrease in lending rates is a surprise turnaround of the country’s financial discipline. With stagnant factory growth and real estate coming to a standstill, 2014 has been a remarkably slow-paced year for the Chinese economy. They continue to steal American secrets though, and spy on American targets while the Obama administration allows it to happen. China still has shown to be malicious to its neighbor and rivals.
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The global impact – soaring markets
Whereas the interest rate slash by China is a clear indicator of the rising concerns of the dwindling economy, in the short term it has sent the global markets buzzing. The FTSE 100 traded up 1.14% immediately after the announcement hit global news stations. France’s CAC, Germany’s DAX, and Euro STOXX 50 were all up by between 0.75% and 1.0%, riding on market sentiment. The Australian Dollar, commonly touted as an alternative to less liquid Chinese investments, also rose post-announcement, along with oil prices that briefly jumped 2%.
The decision by PBoC to cut interest rates in the wake of the slowing Chinese economy came from factors such as rising wages, increased global competition, market driven prices of input prices moving higher and pressures upon enterprises to raise efficiency to stay in the market. Static productivity in 2012 and a paltry 3.5% increase in 2013 and another drop in 2014 now includes consumer reluctance to opt for financed purchases – the combined effect being a choke on the growth rate.
The Chinese government’s new way to boost the economy
Deep diving into the implications of interest rate slash surfaces some interesting findings about the Chinese economy. The Chinese financial authorities have been actively taking measures to boost economic growth by changing policies in several ways. Until now, China avoided lowering interest rates to prevent property accumulation the growth of shadow banking.
However, the announcement of interest rate cuts indicates that the authorities are now waking up to the real danger of a massive slump visiting the economy of the world’s most populous nation that draws a lot from consumer spending. ‘Demand Inflation’ is set to cease being the focus, as authorities show an inclination to take measures that could help the economy achieve its official growth targets.
Time will tell
Market analysts believe that the real effect of the interest slash is likely to become evident after a period of six to nine months, when the retail market and conusmers have had enough time to react to the new financial environment.
