China interest rate cut fuels fears over ailing

economy

European markets rise as investors welcome boost from cheaper credit in

China and prospects for further delay to Federal Reserve rate hike in US
China fuelled fears that its ailing economy is about to slow further after Beijing
cut its main interest rate by 0.25 percentage points.
The unexpected rate cut, the sixth since November last year, reduced the main
bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%
The move follows official data earlier this week showing that economic growth
in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one
of the biggest factors, blamed partly by analysts on the high value of Chinas
currency, the yuan.
The rate cut sent European stock markets higher as investors welcomed the
boost from cheaper credit in China, together with the hint of further monetary
easing by the European Central Bank president, Mario Draghi, on Thursday.
Investors were also buoyed by the likelihood that the US Federal
Reserve would be forced to signal another delay to the first US rate rise since
the financial crash of 2008-2009 until later next year.
The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German
Dax and French CAC were up almost 3%.
The Peoples Bank of Chinas last rate cut in August triggered turmoil in world
markets after Beijing combined the decision with a 2% reduction in the yuans
value. Shocked at the prospect of a slide in the Chinese currency, investors
panicked and sent markets plunging.
Some economists have warned that the world economy is about to experience
a third leg of post-crash instability after the initial banking collapse and

eurozone crisis. The slowdown in China, as it reduces debts and a dependence

for growth on investment in heavy industry and property, will be the third leg.
World trade has already contracted this year with analysts forecasting weaker
trade next year. The International Monetary Fund (IMF) in July trimmed its
forecast for global economic growth for this year to 3.1% from 3.3%
previously, mainly as a result of Chinas slowing growth. The Washingtonbased fund also warned that the weak recovery in the west risks turning into
near stagnation.
At its October annual meeting, it said growth in the advanced countries of the
west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while
growth in the rest of the world is expected to fall from 4.6% to 4%.
Sanjiv Shah, chief investment Officer of Sun Global Investments, said: The
Chinese decision indicates that the authorities are clearly worried about the
slowdown in the pace of economic growth and have decide to engage in more
pre-emptive action. The [Peoples Bank of China] has cut benchmark rates and
reduced banks reserve requirements as well as scrapping deposit controls.
But Mark Williams, chief Asia economist at Capital Economics, remained
upbeat about the prospects for Chinas sustained growth, arguing that the cut
in interest rates was part of a longer-term strategy and not a reaction to
deteriorating growth.
The key point is that we shouldnt take todays announcement as evidence
that policymakers have grown more concerned about the economy. Instead,
this is a controlled easing cycle that underlines how Chinas policymakers,
unlike many of their peers elsewhere, still have room for policy manoeuvre,
he said.
Admittedly, were still waiting for clear evidence of an economic turnaround
Septembers activity data still dont show any great improvement.
Nonetheless, with more stimulus in the pipeline, we still believe the economy
will look stronger soon.
Corporations considered bellwethers of the global economy have also warned
of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has
seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut

its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container
shipping market.
The Danish conglomerate operates Maersk Line, the worlds largest container
shipping company which transports roughly 20% of all goods on the busiest
routes between Asia and Europe.
http://www.theguardian.com/business/2015/oct/23/china-interest-rate-cutfuels-fears-chinese-economy
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