The stock market in Asia experienced a surge after the People’s Bank of China took the step of reducing its medium-term policy rate due to a sluggish economy. Simultaneously, the US Federal Reserve chose to keep interest rates steady.
The Hang Seng China Enterprises index, which monitors mainland Chinese companies listed in Hong Kong, saw a 1.4% increase, while the CSI 300 of Shanghai- and Shenzhen-listed stocks gained 0.5%. Japan’s Topix also climbed 0.4%, and Australia’s S&P/ASX 200 rose 0.3%.
These gains were a direct result of the PBoC lowering its medium-term lending facility rate by 0.1%, bringing it down to 2.65%. This followed a similar 0.1% reduction earlier in the week for the seven-day lending rate, marking the first attempt in nine months to stimulate short-term liquidity in China’s interbank market.
The accompanying data released alongside this announcement underscored the slower pace of China’s economic recovery. Industrial output and retail sales fell below the expectations of economists, and the contraction in property investment and sales worsened in May.
In currency markets, the renminbi depreciated up to 0.3% against the dollar, reaching Rmb7.1807 after the central bank’s rate cut. This takes the currency’s overall decline against the greenback for the year to date to approximately 4%, also marking a fresh six-month low.
However, analysts remain doubtful that the reduction in the medium-term rate, which acts as the foundation for China’s benchmark prime loan rate, will be sufficient to revive economic growth.
“The current state of the economy is incredibly disappointing,” stated Robert Carnell, head of Asia-Pacific research at ING. He believes the renminbi could weaken to Rmb7.2 against the dollar “within days” and that policymakers will rely on a weaker currency “as one of the tools necessary to support the economy”.
The gains witnessed in Asia followed a tumultuous day on Wall Street, where the S&P 500 index ended 0.1% higher and the tech-focused Nasdaq Composite increased by 0.4% following the Fed’s widely expected decision to maintain the federal funds rate on Tuesday.
Nevertheless, this pause at a range of 5% to 5.25% – following several rate hikes throughout a 14-month period – coincided with forecasts from Fed officials indicating that most policymakers anticipate two additional quarter-point increases later this year.
ANZ economist Brian Martin described the Fed’s decision as a “hawkish skip”. He pointed out that while there are some positive indications of a decline in inflation intensity, it is too premature to conclude that inflation has been vanquished amidst a still robust labor market.
The hawkish outlook bolstered the dollar in Asian trading, leading to the dollar index, which tracks the US currency against a basket of other currencies, to rise by 0.3%.
Futures markets predicted that the S&P 500 would open with little change later in the day, while the start of trading in London expected the FTSE 100 to decline by 0.3%.
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