China rate cut today will spur short covering in markets but that will not last long. Rate cuts will not ease China’s structural issues of weak growth driven by falling exports. Volatility will stay high in global markets until some sort of stability emerges at lower levels.
China central bank PBOC cut its benchmark one year lending rate by 25 bps to 4.6% and the one year rate for deposits by a similar margin to 1.75%. PBoC also lowered the reserve requirement for banks by 50 bps, which will ease liquidity and enable banks to lend more to the economy. The moves comes at a time when Chinese economy is feeling the brunt of slowdown (Read our analysis on China Economy) and the government is finding it tough to achieve its target of 7% GDP growth for this year. The Shanghai Composite index on Tuesday closed down by 7.6% followed by 8.5% decline on Monday. PBoC has cut interest rates for the fifth time since November 2014 and reserve requirement for the third time.
Earlier on 11th August, China acted to devalue its currency in order to boost its exports after China’s exports declined by 8.3% in the month of July which was far worse than expected after an uptick of 2.8% in the month of June. PBoC after the move said that it will allow market driven currency level, which spurred the biggest devaluation in two decades and threatened to trigger an outflow of capital.
Global markets have plunged since the PBoC acted to devalue the Yuan and emerging market currencies and commodities prices were hit hard, plunging to multiyear low levels. On Tuesday Asian market were broadly up except Chinese and Japanese indices that closed down by 7.63% and 3.96% after a rout on Monday. European market after the PBoC acted on Tuesday were up in the range of 4% to 5%.