Here’s Why Global Markets Rallied as Chinese Stocks Continue to Fall
Markets around the world are rallying Tuesday thanks to China's central bank's combination punch: low interest rates and more money.
China’s benchmark stock market, the Shanghai Composite Index, dropped 7.6 percent Tuesday — the second straight day of dizzying losses. But major stock indexes around the world are trading higher; as of 12:22 p.m. in New York, the Dow Jones Industrial Average was up 364 points. That’s a total turnabout for the same indexes that were tanking during “Black Monday” fallout that China sparked. What gives?
One of the reasons for the rally is that stocks are relatively cheap right now; the Dow dropped 588 points yesterday, giving buyers an opportunity to buy equities at a lower price, a rare occurrence during the six-year bull market. But traders around the world are also encouraged by China’s combination punch Tuesday.
On its web site, The People’s Bank of China announced it would reduce interest rates by one-quarter of a percent to 4.6 percent, the second cut this summer, which makes it cheaper to borrow money. It also announced it would lower money reserve requirements for banks, which frees up spending. Additionally, it hinted more stimulus could come in the future.
“Currently, there is still downward pressure on China’s economic growth,” the central bank said in a statement. “There is also relatively big volatility in global financial markets, which require more flexible usage of monetary policy tools.”
This did little to stop the continuing carnage in Chinese equities, which continued sliding Tuesday. And more meddling by China’s central bank is not something the White House or the International Monetary Fund wants; both have urged China to allow supply and demand to dictate the direction of its economy. But it was enough to give investors elsewhere confidence.
“China’s decision to cut … will be regarded by many investors as overdue,” JPMorgan said in a research note Tuesday.
Overlooked amid the rapid decline in Chinese equities is the fact that China is still growing — just not as fast as it has over the last few decades. Beijing still maintains it will hit its 7-percent growth rate in 2015.
Granted, that’s the slowest expansion pace in more than two decades. But take a look at charts below. They’re based on IMF data, and track annual GDP growth from 2010 projected to 2020. Toggle between the United States and China, and it’s clear Beijing’s economy is slated to grow at a much faster clip than its U.S. rival.
Still, Scott Kennedy, a China expert at the Center for Strategic and International Studies, said more pain in China’s stock market is down the line.
“We don’t know where the bottom is in China and I don’t think we’re there yet,” he told Foreign Policy. “Their economy has slowed, even though their slow is our fast.”
Photo credit: Spencer Platt/Getty Images
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