Budget blues dampen Chinese rate cut’s boost to Australian shares

Nanjing Night Net

A�0�2cut in�0�2Chinese interest rates at�0�2the weekend has sparked a short-lived surge in Australian shares on Monday morning and�0�2analysts�0�2predict�0�2more Chinese�0�2monetary easing.

China cut its benchmark one-year lending rate by 25 basis points to 5.1 per cent and its benchmark deposit�0�2rate by the same amount to 2.25 per cent at�0�2the weekend.

The news of the cut –�0�2plus a very strong 1.5 per cent lift in the Dow Jones on Friday –�0�2pushed the local sharemarket indexes 0.9 per cent higher after the open.

However,�0�2the market soon fell back�0�2on domestic factors, IG Markets strategist Stan Shamu said.

“The cut�0�2had a pretty positive impact, we got off to a good start,” he�0�2said. “It had a big impact but it then turned very minor.”

Another sell-off of the banks and general jitters ahead of Tuesday’s federal budget�0�2stripped�0�2the local market of all its gains�0�2before noon, he said.

At 1.20pm�0�2AEST�0�2on Monday,�0�2the S&P/ASX 200 was up just 0.09 per cent at 5639.4.

The cut in rates by the People’s Bank Of China�0�2was the third in six months.�0�2The central bank is trying to lift growth in what appears likely to be China’s worst year in a quarter of a century.

The PBOC acknowledged that “China’s economy is still facing relatively big downward pressure”.

“At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average.”

The rate cut followed weaker�0�2than expected April trade and inflation data, which analysts said may have spurred the PBOC�0�2decision.

“In a nutshell, we are neither surprised nor impressed by this interest rate cut,” Societe Generale analyst Wei Yao said.�0�2“If economic growth continues to slide, policy easing will have to step up as well.”

Westpac analyst Jonathan Cavenagh said further�0�2Chinese monetary easing was likely.

“Sunday’s announcement is unlikely to be the last, with our economics team expecting the one-year lending rate to be 4.6 per cent by year’s end, while the required reserve ratio is expected to fall to 16.5 per cent from the current 18 per cent.”

Sentiment in Chinese shares should be improved by the cut, he�0�2said.

The correlation between China’s sharemarket and others in the region “had not been that strong”, he said, so the spillover effect to other sharemarkets, including in Australia, was “limited”.

Capital Economics said it�0�2also expected the required reserve ratio to fall from 18 per cent to 16.5 per cent.

However, as inflation was expected to rise later in the year – automatically pushing real interest rates down –�0�2further cuts to benchmark rates by the PBOC�0�2were unlikely,�0�2it said.

“Today’s cut to benchmark interest rates is not a sign of panic, as some will argue, but a rational response to weaker�0�2than�0�2expected data,” Capital Economics said.

“Policymakers have room to act more forcefully if needed but are choosing to dole out stimulus in a�0�2measured way.”

Goldman Sachs Group�0�2economist Song Yu –�0�2who correctly�0�2declared growth in 2014�0�2had troughed�0�2and�0�2would be followed by a rebound �0�2–�0�2said there would be�0�2a repeat of that pattern�0�2this year.

“Now it’s very similar to this time of last year in terms of having a combination of monetary, fiscal and administrative loosening,” said the Beijing-based economist, ranked the best overall forecaster of China’s economy by Bloomberg Rankings for the past two years. “The data in recent years consistently show us one thing: If the Chinese government really, really wants to push up short-term growth, they can.”

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