China rate cut lifts Asia stocks but concerns remain

GMT 07:01 2015 Monday ,26 October

Arab Today, arab today China rate cut lifts Asia stocks but concerns remain

Emerging market currencies retreated
Hong Kong - AFP

Asian traders on Monday welcomed China's decision to cut borrowing costs again and remove a cap on savings rates ahead of a key policy meeting this week, but analysts warned the move indicates further weakness in the world's number two economy.

While Friday's move -- the sixth reduction since November -- realised hopes for further monetary easing, Premier Li Keqiang tempered expectations at the weekend by indicating growth could come in below seven percent this year.

Emerging market currencies also retreated as the latest policy moves led to concerns about the Chinese outlook, a week after official data showed the economy grew in the third quarter at its slowest pace in six years.

Global markets suffered a mauling in July-September on worries about China as well as an expected US rate hike. However, with the Federal Reserve now showing signs it will delay any monetary tightening until next year, October has seen a healthy rally across equities and higher-risk assets.

On Friday the People's Bank of China cut interest rates by 0.25 percentage points and lowered the reserve ratio requirement, the amount of cash banks must keep in reserve.

It also abolished its official cap on rates for savers, allowing financial institutions to offer a market-based rate of return for customers.

The decision -- days before the Communist Party meets Monday to set the direction for the economy in the next Five Year Plan -- will bring significantly more competition to the financial sector in the predominantly state-controlled economy.

- China fears linger -

It also comes as Beijing seeks a greater international role for the yuan, including joining the exclusive ranks of the International Monetary Fund's special drawing rights reserve currency.

Asian markets rallied in early trade Monday, with Tokyo up 1.21 percent at lunch, Hong Kong up 0.53 percent and Shanghai climbing 0.40 percent.

Sydney, where several firms with close business ties to China are listed, was up 0.24 percent and Seoul put on 0.20 percent.

However, some commentators suggested the move could hide deeper problems in the Asian economic giant.

"China's policy easing suggests the Chinese economy still faces significant downward pressure," Australia & New Zealand Banking Group analysts, led by Cherelle Murphy, wrote in a note to clients.

"While central bank actions across the G10 have typically been viewed in a 'bad-news-is-good' framework, the easing from the PBoC in China late on Friday was seen as a foreboding sign for global growth."

High-risk currencies receded against the dollar as investors' unease over the Chinese economy trumped expectations for US interest rates to stay at record lows into 2016.

The South Korean won shed 0.84 percent, Indonesia's rupiah eased 0.15 percent, and the Malaysian ringgit was 0.58 percent lower. The Taiwan dollar and Thai baht also dipped.

The euro remained under pressure against the yen and dollar after European Central Bank head Mario Draghi on Thursday hinted at another round of monetary easing to boost the eurozone economy.

The single currency bought $1.1031 and 133.66 yen, compared with $1.1016 and 133.80. It had been sitting at $1.1339 and 135.65 yen in Asia Thursday before the comments.

-- Bloomberg News contributed to this story --

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