InvestmentsDec 3 2014

China’s rate cut ‘will not lift emerging markets’

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The recent cut in Chinese interest rates will fail to have an impact on emerging market equities and China itself, an economist has claimed.

Adam Collins, economist at Capital Economics, explained that the initial gains in emerging market equities after the Chinese government’s decision earlier this week to cut interest rates were unlikely to support a trend of growth.

The MSCI Emerging Markets index gained 2 per cent after the announcement. The biggest beneficiaries were Peru, Brazil and South Africa, which are commodity exporters.

The MSCI Peru index surged 4 per cent on the first day of trading after the China cut, but then fell more than 4 per cent the day after.

Similarly, the MSCI Brazil index gained close to 4 per cent, before pulling back 3 per cent the next day, while the MSCI South Africa index jumped slightly more than 3.5 per cent, before falling close to 4.5 per cent the following day.

“Any hope China’s interest rate cut will stimulate growth in other emerging economies through stronger commodity demand are unfounded,” Mr Collins said.

“In fact, the policy move is unlikely to have a major impact on economic growth in China.

“While we expect two further cuts in China’s benchmark lending rates by the middle of next year, quantitative controls on the supply of credit mean that this will not lead to the sizeable acceleration in credit that would be needed to drive a substantial pickup in GDP growth.”

The Shanghai Composite index rose 1.9 per cent on the first trading day after the announcement, but Mr Collins said he was bearish on the country, claiming “the policy move is unlikely to have a major impact on economic growth in China”.

The rate cut and further initiatives by the government would not generate enough momentum to drive an extensive pickup in GDP growth, he claimed.

Still, he does not expect a “hard landing” for the country and is optimistic that emerging market equities, on average, should perform.

“In our view, China’s interest rate cut was primarily a response to concerns about financing costs, rather than any major worries about economic growth,” Mr Collins said.

Capital Economics predicts other emerging market countries could follow China in a surprise rate cut. Two major economies “worth keeping an eye on” are India and Mexico.