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China's rate cut - what's next?

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November 25, 2014 asia, asian markets, aud, cac 40, cad, central bank, central banks, china, china 2014, china banks, china consumer spending, china credit bubble, china economy, china economy growth, china equity market, china gdp, china growth, china in 2014, china manufacturing, china outlook, china pmi, china policy, china politics, china rates, china slowdown, china stock market, china stock market', chinese, chinese banks, chinese economy, chinese gdp, chinese growth, chinese stock market, chinese yuan, cny, commodities, dax, dax index, equities, equities trading, equity, equity bubble, equity index, equity market, equity market 2014, equity markets, equity portfolio, equity portfolios, equity risk premium, equity strategy, equity trading, euro, europe, europe market, forex, forex markets, forex trading, fx, fx market, fx markets, fx options, fx strategy, fx trade, fx trading, macro, macro economics, macro economy, macro policy, macro strategy, macroeconomics, saxo tv, tradingfloor.com, usd, yuan
China took markets by surprise last week, when it cut interest rates for the first time in over two years. The People's Bank of China cut its one year deposit rate to 2.75% from 3.0% to try to revive its economy. The one-year lending rate was also reduced from 6% to 5.6%.

The move sent markets up across Asia and Europe with the Shanghai Composite index jumping 1.9% to 2,532.88 on the news and Hong Kong's Hang Seng also rising 1.9% to 23,893.14. The German DAX rose 0.7% while France's CAC-40 was up 0.9%.

It remains to be seen what impact the rate cut will have on the Chinese economy, says Pauline Loong from Asia-analytica. As China is not an open and free economy, the multiplier effects of the rate cut on the broader economy will differ to how the economy would react in say Britain, the United States or other free market economies, says Pauline.

She says market sentiment rather than the economy is the decisive factor for China when it decides on its monetary policy. Beijing wants private sector investments to boost its economy and market sentiment is key to attract these investments. 

China will be keeping a close eye on the mood in the markets in coming weeks, according to Pauline. She sees no need to China to take further action to boost the economy ahead of a key December meeting, where Beijing will decide on its economic strategy for 2015. But should market sentiment start to sink, then China may start hinting a future action to lift the mood.