Nervous gains in Asia, in volatile response to China rate cut


A multiple exposure picture shows an investor monitors the index price at a stock exchange market in Shanghai, China. Photo: Wenhao Yu/EPA

A multiple exposure picture shows an investor monitors the index price at a stock exchange market in Shanghai, China. Photo: Wenhao Yu/EPA

Asian shares made tentative gains Wednesday after a China interest rate cut designed to soothe fears about stalling growth in the world's number-two economy, but more volatility was forecast in a crisis that has panicked global markets. 

China's central bank reduced interest rates and slashed the amount of money banks need to hold in reserve on Tuesday -- its second such double move in two months -- in a bid to bolster slowing growth.

The measures are not only expected to help boost cash flow in China, but also revive confidence that Beijing can steer the world's second-largest economy away from a hard landing and keep global growth on course.

The cuts initially fuelled a rebound in global equities, with European shares surging after their heaviest losses since the 2008 financial crisis on Monday, but optimism had fizzled by the end of US trading and Wall Street finished down.

Asian shares pushed higher on Wednesday, with Tokyo closing up 3.20 percent, but trading remained choppy and dealers said the rally could easily break if Beijing did not do more to shore up confidence.

"The Chinese central bank has belatedly made a move," said Hiroichi Nishi, a manager at SMBC Nikko Securities.

"One of the reasons behind the steep falls so far was the fact that the Chinese authorities hadn't done anything. The fact that they have now shows that they're determined not to let the economy worsen."

Despite volatile early trading that saw China's benchmark index fall as much as 3.85 percent and rise as much as 1.24 percent, Shanghai managed to hold onto the gains by mid-afternoon, adding 0.72 percent.

Other Asian share markets also gained, with Seoul closing up 2.57 percent and Sydney adding 0.69 percent, while Hong Kong traded around the flatline in afternoon deals.

Zhang Yanbing, an analyst from Zheshang Securities, said the central bank's cuts had tamed the "panic sentiment" that had gripped Shanghai, but warned: "There will still be fluctuations as views towards the market's prospects are divided."

- 'Full-blown crash' - 

Chinese stocks have lost more than 40 percent of their value since a year-long, debt-fuelled rally collapsed in June, prompting Beijing to unleash unprecedented measures to support the market -- including using state-backed vehicles to buy up shares.

While the slump in Shanghai may have a limited impact on the broader economy -- worth some 13 percent of world output --it reflects dissipating confidence among investors that the sky-high valuations of quoted companies are warranted.  

Some analysts see Beijing's handling of the market slump as a further litmus test of the government's ability to guide the economy to a more market-oriented model after the shock devaluation of the yuan two weeks ago. 

"If problems on China's financial markets and real economy deepen, and the authorities fail to contain the situation, a full-blown financial and economic crash in China could ensue," said Christophe Donay, chief strategist at Pictet Wealth Management.

"This is currently the biggest risk for the global economy and financial markets."

China's central bank on Tuesday warned that "economic growth rate remains under pressure", adding the cuts were meant in part to "support the real economy to continue to develop healthily".

The People's Bank of China (PBoC) cut its benchmark lending and deposit interest rates by 0.25 percentage points each and its reserve requirement ratio by 0.50 percentage points.

The bank has now cut interest rates five times since November in a bid to spur the slowing economy as concerns mount it may miss its seven percent growth target for the year.

But international investors said more would need to be done to fully reassure markets, especially as the US Federal Reserve is expected to raise interest rates for the first time in nearly a decade by the end of the year.

The head of the PBOC's research unit Tuesday blamed the US for the market volatility, saying expectations for a US rate rise in September had been the "trigger" for the wild swings in world markets, Xinhua reported.

"A circuit-breaker is needed to dispel excessive pessimism and restore confidence," Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong, told Bloomberg News.

"Further support measures in the coming weeks and months will be needed."

-- Bloomberg News contributed to this report --

© AFP

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