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China Stock Turmoil 2015
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A securities firm in Tokyo displays China stocks. The PBOC cut interest rates after the Shanghai Composite Index closed more than 7 per cent down. Photo: Bloomberg

Update | China cuts interest rates in bid to halt stock turmoil and reassure markets after 'Black Monday'

Decision to also cut lending limits comes as Premier Li Keqiang says there was no basis for continued depreciation of the yuan

Beijing cut interest rates and eased bank lending limits yesterday in a bid to stop panic selling in mainland stock markets that smashed them to eight-month lows, even as equities elsewhere in the world began to recover from the previous day's rout which investors termed "China's Black Monday".

The move came as Premier Li Keqiang said there was no basis for continued depreciation of the yuan. He added that the yuan would "stay at a reasonable and balanced level".

China stock index futures traded in Singapore jumped nearly 6 per cent higher in response to twin moves that sliced 25 basis points from borrowing costs and cut the proportion of reserves lenders must hold on deposit with the central bank, injecting an estimated 650 billion yuan (HK$786 billion) of liquidity to help support the economy.

US stocks also rebounded last night as investors sought out bargains a day after Wall Street turned in its worst performance in four years.

Shortly after opening, the Dow Jones industrial average was up 374.74 points, or 2.36 per cent, at 16,246.09, with all 30 of its components in the black.

A global market meltdown on Monday was sparked by investor fears that China's fragile share markets were spiralling beyond the control of policymakers and would hurt economic growth. It triggered a flurry of international political rhetoric with US presidential hopefuls, European officials and others pointing fingers at Beijing and urging the government to act to stabilise the country's markets and economy.

MORE ON THIS: China Markets Live - Early calls, price forecasts and analyst views

"I'm the one that says you better start uncoupling from China because China's got problems," real estate mogul and Republican front-runner Donald Trump said on Fox News, with similar views echoed by fellow Republican hopefuls Scott Walker and Chris Christie.

While uncoupling from the world's second-largest economy and source of the single biggest driver of global growth is not possible, investors showed signs yesterday of distinguishing more clearly between the mainland and elsewhere.

"What we are witnessing is a struggle in the market between deleveraging and value-at-risk selling competing with decent economic fundamentals and continued central bank support," UBS Wealth Management global chief investment officer Mark Haefele said.

"For now we believe the positive factors will win out. But market shocks of this magnitude have the potential to overpower fundamentals," he wrote in a note to clients.

Key Asian stock markets recovered a degree of composure - led by a 3.6 per cent rise on Taiwan's TAIEX index and a 2.6 per cent gain for the Australian All Ordinaries index - despite the 7.6 per cent slide on the Shanghai Composite Index which marked its sharpest four-day fall since 1996.

US stock futures and major European share benchmarks also traded firmer at the open, while copper - a key industrial metal used by investors as a gauge of sentiment on China's economic health - largely held its ground, albeit at around six-year lows. All of which suggests that the mainland is not headed for the economic oblivion that glo bal markets were pricing in on Monday.

"What you have to remember with China is that people have been waiting for the coming crash, year after year," said Miranda Carr, head of China thematic research at BESI, the equity research arm of Portugal's Banco Espirito Santo de Investimento. "All of the bearish sentiment that has built up since 2009 has crystallised for them."

The so-called 'perma-bears' on China's economy say Beijing's massive fiscal and monetary stimulus package unleashed in response to the global financial crisis of 2008-09 further inflated an unsustainable bubble in the economy that policymakers have battled with ever since.

Debt across the mainland economy has spiralled to more than 250 per cent of GDP, creating a substantial drag on growth.

But that does not convince all investors and economists that labelling China as a convenient scapegoat for one of the world's worst stock market sell-offs since the financial crisis makes sense.

Before Monday's rout, world equities had already suffered their steepest consecutive three-week fall since the autumn of 2014 and the deepest single week loss since May of 2012, indicating the degree to which investors had been paring back exposure to risky assets in the face of mounting evidence that world economic growth is slowing.

"What is happening here is obvious," Christopher Wood, investment strategist at CLSA wrote in a client note. "That is that world stock markets, and in particular developed world stock markets, have finally succumbed to the evidence of the growing downturn in global growth."

Some analysts say China has been a convenient whipping boy for increasingly nervous global investors, fretting that anticipated rises in interest rates in the US and the UK heralds the end of the era of super cheap money.

That cheap cash has, after more than six years, delivered only a tepid consumer recovery in developed economies, but has fuelled massive rises in asset prices which must inevitably come down.

 

 

This article appeared in the South China Morning Post print edition as: China cuts rates in bid to halt stock turmoil
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