The People’s Bank of China cut the one-year deposit rate by 25 basis points and one-year benchmark lending rates by 40 basis points, representing a surprise turnaround in policy.
Stalls in factory growth and the property market have contributed to the slowest rate of economic expansion that China has experienced in nearly a quarter of a century.
The FTSE 100 is trading up 76 points (1.14%) at 6754, largely due to the move by China.
Neil Williams, group chief economist at Hermes Investment Management, believes that despite the authorities’ efforts it could be at least six months before the Chinese economy picks up pace again.
“The authorities have spent the past six months ‘throwing the kitchen sink’ at the economy by easing policy by all means bar one – interest rate cuts,” he said. “These were to be avoided to prevent stoking up the property and shadow banking sectors. Today’s move – the first cuts for two and a half years – thus suggests even China now considers demand inflation to be ‘yesterday’s problem’, but also raises the chance of shielding its official growth target,” Williams added. “I agree. If the usual lags hold, the PBoC’s deceleration in money-growth suggests another six to nine months before activity accelerates.
“Mindful of China’s competitiveness hit as wages rise, competition picks up, and input prices become more market based, enterprises face pressure to raise efficiency,” Williams continued. “I estimate China’s productivity was static in 2012, grew only 3.5% year on year in 2013, and is now falling. These follow double-digit rises between 2000 and 2011. Reflecting this, and the fear of capital withdrawal, we thus question the urgency in 2014 in liberalising the capital account for full currency convertibility,” he said.
Markets were already moving up as the China news filtered through, boosted by comments from ECB President Mario Draghi interpreted as laying the groundwork for full quantitative easing in the eurozone.
