China’s central bank policy easing gives boost to European and US markets

China’s central bank policy easing gives boost to European and US markets

Beijing acts to tackle slowdown in world’s largest economy with biggest easing of policy by People’s Bank of China since 2008

 

The biggest easing of policy by the People’s Bank of China since the depths of the global financial crisis in late 2008 provided a boost to stock markets in Europe and North America on Monday.

 

Share prices rose as investors responded positively to signs that Beijing was acting to tackle the slowdown in the world’s biggest economy in recent months.

 

The move was also seen as evidence that China’s weakness was more marked than has been suggested by official economic data, which shows the economy expanding at an annual rate of 7%.

 

In Europe, the London’s FTSE 100 Index closed almost 58 points higher at 7052.47, with mining stocks boosted by hopes that stronger Chinese growth would lift demand for industrial metals. Elsewhere, the German DAX was up almost 200 points at 11880 and the French CAC moved up by almost 40 points to 5182 as optimism about China outweighed growing fears of a Greek debt default.

 

Shares were also up in early trading in New York, with all the main indices on Wall Street up by around 1%.

 

Policymakers in Beijing have been trying to secure slower but better balanced growth in China following the rapid debt-fuelled expansion that followed the global downturn. Despite taking fresh action late last week to rein in stockmarket speculation, Beijing is now signalling that it believes the economy is cooling too quickly.

 

The central bank eased credit conditions by reducing the required reserve ratio, which sets a limit on the proportion of deposits commercial banks can lend out. Further easing is expected over the coming months.

 

Mark Williams, chief Asia economist at Capital Economics, said: “Sunday’s cut to the required reserve ratio (RRR) for China’s banks signals a stepping-up of policy support. It also suggests that any concerns policymakers have about the rapid gains in equity prices have been put on the back burner for now.

 

“The RRR has been reduced by a minimum of [1 percentage point], effective today. It now stands at 18.5% for large banks. The RRR for some smaller banks and for banks meeting targets for lending to small firms and to agriculture has been reduced by more. We had expected a further RRR cut around now (the last one was in February). But the cut was double the usual 50bp size. This is the first move on this scale since late 2008. As such, we see it as signalling a shift to a more supportive policy stance.”

 

Homin Lee, Asia Economist at Lombard Odier, said: “We see additional RRR cuts being implemented over the course of the year, in the tune of one percentage point (or even more) and possibly alongside further cuts in benchmark interest rates and short-term liquidity injections.”