China Rate Cut Fuels Global Stock Surge


After soaring on Friday, global equities continue to roar this week after China’s decision to cut interest rates for the sixth time in a year.  The People’s Bank of China announced a 25 bp interest rate cut, down to 4.35% for one-year durations. The purpose of the move is to help China reach its 7% growth target for 2015, after official figures showed 6.9% GDP growth in the 3rd quarter of 2015.

The falling interest rates helped Chinese equities surge, with the Shanghai Composite rising over 1% on Monday. Hong Kong’s Hang Seng was up almost as much, over 0.76%, in early morning trading, although the index erased most of its gains by noon.

Japan’s Nikkei 225 rose 1.25% on the news as investors expect quantitative easing in Japan combined with stimulative monetary policies in the region to boost equity values. South Korea saw its KOSPI index mostly flat in early morning trading, although the country saw economic growth rise to its 5-year high, at 2.6% in the 3rd quarter of 2015. Korea’s growth rate has more than doubled from the 1.2% year-over-year rise of GDP in the second quarter.

Despite Korea’s strength, which is largely attributable to rising domestic demand, the country is seeing weakening exports, with car manufacturer Hyundai announcing disappointing revenue growth because of weak demand worldwide for their vehicles. Like its neighbors China and Japan, South Korea has used several monetary and fiscal stimulus initiatives to encourage more demand that is domestic in an effort to increase economic activity in the country.

However, weakening demand from China has hurt Korean firms in 2015, although some analysts expect consumer demand in China to pick up by the end of the year.

Falling Imports, Worrying Shadow Stats

So far, for 2015, Chinese consumption has been in the decline, with imports falling 17.7% in local currency terms in September following a sharp increase in August. The country’s trade surplus also rose, indicating the country’s demand for imports from abroad remains weak. Some analysts predict a continued devaluation of the Chinese yuan will likely weaken demand for imports even further, pressuring domestic consumption and stunting growth.

Several analysts who reject the official China GDP growth number reiterate concerns that Chinese growth is substantially lower, with estimates ranging from 3% to 6.8%. The lower end of the range comes from analysts who look at electricity consumption, port traffic, debt loads, and other metrics to conclude that China’s growth is decelerating at a significant rate, with some analysts predicting that Chinese economic growth will continue to deteriorate.

However, others note that oil imports are rising in China, which could be the beginning of an improvement in domestic demand. In September, oil imports rose 8.8%, and cheap oil is likely to encourage further demand in the coming months, which in turn could yield greater consumer spending and more economic activity nationwide.