China’s central bank on Tuesday slashed a key interest rate for the first time since it was introduced three years ago, a move that could pave the way for more policy action as the country tries to protect its slowing economy.
Meanwhile, Asian markets broadly advanced as investors digested the latest news about US-China trade talks. Investors also shrugged off disappointing economic data out of China and Hong Kong.
China’s central bank cuts a key loan rate
The People’s Bank of China cut the one-year rate at which it lends to banks through its medium-term lending facility from 3.30% to 3.25%. It was the first cut to that rate since it was introduced three years ago, according to Julian Evans-Pritchard, senior China economist at Capital Economics.
Evans-Pritchard noted that the cut indicates that China is starting to take more direct steps to push down borrowing costs, and he suggested that the central bank could make even more rate cuts in the future.
“The cut could well precede reductions to the rates on the rest of the PBOC’s lending facilities,” Evans-Pritchard wrote in a research note, adding that policy decisions “tend to move in tandem.”
He also said the cut should lead to a lower Loan Prime Rate. China recently introduced the LPR as a tool to gradually replace its existing fixed benchmark lending rate and make it easier for companies to borrow money. The LPR, which will become the new benchmark for banks to price loans, is supposed to better reflect changes in market rates.
China has taken several steps in recent months to boost its slowing economy, and analysts have repeatedly pointed out that more aggressive measures could be on the way. Chinese officials, meanwhile, have said they have enough tools available to bolster the economy as needed.
New economic data shows that growth is still soft. China’s services sector grew at its weakest pace in eight months, according to private survey data released Tuesday by the media group Caixin and the research firm Markit.
The Caixin/Markit services purchasing managers’ index (PMI) dropped to 51.1 in October from 51.3 in September. That’s its lowest reading since February.
But the fallout “should be limited” for investors, according to Jeffrey Halley, a market analyst with the research firm Oanda. He said markets will instead concentrate on industrial PMI data and their potential to rebound if an interim trade deal is signed soon.
Markets climb on trade hopes
New reports on Tuesday gave reason for hope on US-China trade talks. The Financial Times reported that Trump administration officials are debating removing some existing tariffs on Chinese goods to help seal a partial deal that would pause the trade war with Beijing as early as this month.
That news sent markets climbing. The Wall Street Journal reported later in the day that both the United States and China were “actively considering” tariff rollbacks.
The United States is assessing current tariffs as it works to finalize “phase one” of a trade deal, officials told CNN, but no decisions have been made beyond the tariff relief announced last month.
Over in Shanghai, Chinese President Xi Jinping spoke at an economic event on Tuesday, where he again stressed Beijing’s commitment to a multilateral global trading system and a more integrated global economy. He also promised to further open up China’s market and improve its business environment.
One of the key messages from the event “is that China remains open for business,” said Stuart Tait, HSBC’s head of commercial banking for Asia Pacific.
“The dialogue that took place stressed the importance of reducing tariffs and setting up new free trade zones. This is music to the ears of Asian companies,” he said.
Hong Kong data disappoints
Meanwhile in Hong Kong, manufacturing data plunged. Growth output from the financial hub’s manufacturing sector fell in October, the latest sign that five months of massive protests are hitting Hong Kong’s economy hard. The latest purchasing managers index (PMI) fell to 39.3 in October, from 41.5 in September, according to data published by research firm IHS Markit. The protests have pushed Hong Kong into its first recession since the global financial crisis.
IHS Markit said the rate of decline for business activity was the fastest since the survey began over 21 years ago.
The uncertainty surrounding a resolution to the political crisis “will likely mean that the Hang Seng underperforms the rest of the region for the foreseeable future, especially some of their big-name banks,” Oanda’s Halley said.