MONEY interest rates

China Cuts Interest Rates, Sending Stock, Commodity Markets Higher

A man rides his electric bicycle passing the People's Bank of China (PBoC).
A man rides his electric bicycle passing the People's Bank of China (PBoC). Zhang Peng—LightRocket via Getty Images

Beijing moves to support an economy growing at its slowest rate in five years

China’s central bank cut its official interest rates for the first time in two years Friday, in a surprise move that sent international stock and commodity markets sharply higher.

The action by the People’s Bank of China, which comes in response to a string of disappointing economic data and increasing signs of tension in local money markets, is the authorities’ strongest show of support in months.

The economy is currently growing at its slowest rate since 2009, and while Beijing has tried to appear relaxed about that, surveys are now showing output stagnating and jobs being shed across the key manufacturing sector.

The PBoC’s action also adds to the trend of central banks across the world easing monetary policy to fight off a growing threat of deflation–a trend that goes in the opposite direction to the U.S., where the Federal Reserve is preparing to tighten policy as the economic recovery gains traction after six years of emergency measures.

The PBoC cut its one-year deposit rate by 0.25 percentage points to 2.75% and the one-year lending rate by 0.40 percentage points to 5.6%.

It timed its announcement to come after the close of financial markets in China, but European stock markets surged on the news, as did prices for commodities such as crude oil. The benchmark contract on the New York Mercantile Exchange rose by $1.50 a barrel, or 2.5%, to its highest level in two weeks, while in Europe, the German DAX index soared 2% and the U.K.’s FTSE 100 rose 1.0%.

European markets were also buoyed by a strongly-worded speech by European Central Bank President Mario Draghi promising aggressive action to ensure the Eurozone doesn’t fall into deflation.

Official interest rates don’t have quite the same function in China’s economy as they do in western ones, due to their interplay with other tools, such as caps on deposit rates and statutory reserve requirements. And the market for money is in any case effectively sealed off from the rest of the world by China’s capital controls. As such, they may not have the same kind of stimulating effect that a similar move by, for example, the Federal Reserve (in the days before the 2008 crisis).

Interestingly, the PBoC also relaxed its control of the amount that banks can offer for deposits. They can now offer 1.2 times the benchmark rate, rather than 1.1 times. These range from 0.35% to 4% depending on maturity. The PBoC enforces a strict cap of 75% on loan-to-deposit ratios in the banking system.

Taken together, the measures look designed to support liquidity into a banking system that is facing challenges on a number of fronts. The sector is seeing a sharp rise in bad loans, especially to real estate developers and construction companies, which is hitting revenue. In addition, banks are also looking to raise capital themselves and amass cash to service clients’ demands for other stock offerings that are due next week in China.

Earlier Friday, the PBoC had felt the need to issue a statement via its account on the Chinese Twitter-equivalent Weibo reassuring market participants that liquidity was “ample”. Benchmark one-week interbank rates had risen by an alarming 0.2o percentage point to 3.48% earlier, according to the Wall Street Journal.

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The Google logo is reflected in windows of the company's China head office as the Chinese national flag flies in the wind in Beijing on March 23, 2010. AFP/Getty Images

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Google is trying to woo mobile developers in China.

The search giant has announced that Chinese app developers will now be able to sell apps to Google Play users in more than 130 other countries. It’s one of Google’s first attempts to engage with the Chinese marketplace since leaving the country in 2010 in following conflicts with the government over national censorship policies.

The Google Play Store is severely restricted in China, so app makers in the country will be selling their wares as exports. It’s no surprise that Google is having second thoughts on leaving the country behind: China has more than 600 million Internet users, and that figure is expected to reach 800 million next year.

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A banner introducing the Shanghai-Hong Kong Stock Connect is displayed in front of a panel showing the closing blue-chip Hang Seng Index at the Hong Kong Stock Exchange in Hong Kong
A banner introducing the Shanghai–Hong Kong Stock Connect is displayed in front of a panel showing the closing blue-chip Hang Seng Index at the Hong Kong Stock Exchange in Hong Kong on Nov. 10, 2014 Bobby Yip—Reuters

The new connection between the exchanges in Shanghai and Hong Kong is another small step toward prying open China’s financial system to the world

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If Beijing continues to reform its financial system — as its top leaders have pledged — the consequences could be huge. Already a titan in manufacturing, a China with a more open, professional and market-oriented financial sector could also become a major player in international banking and other services. Just as newly wealthy Chinese shoppers are reshaping global consumer markets, Chinese investors, once able to more freely take their money out of the country, would become much more important on the world stage too. HSBC, in its report, pointed out that if the Hong Kong exchange was integrated with China’s bourses (in Shanghai and Shenzhen), it would be the second largest stock market in the world, based on the combined value of their listed companies.

That is, of course, in theory only. China never employs the big-bang strategy when it comes to reform, and the Connect program is no different. At the start, the amount of money flowing through the scheme in either direction has been capped, to about $49 billion into China and $41 billion into Hong Kong. That may sound like a lot, but in fact, each figure is the equivalent of only 1% of the total capitalization of the markets in China and Hong Kong. Many investors may dither on the sidelines for the moment since there is some remaining uncertainty over how the scheme will actually operate.

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In this In this photo provided by Xinhua News Agency, a J-31 stealth fighter takes off for test flight ahead of the China International Aviation & Aerospace Exhibition in Zhuhai, China's southern Guangdong province, on Nov. 10, 2014 Liu Dawei—AP

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Chow, secretary-general of the Hong Kong Federation of Students, attends a rally at the Chinese University in Hong Kong
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