In a move that surprised investors last week, the People’s Bank of China instituted a rate cut for the first time since July 2012. The PBoC lowered the one-year deposit rate from 3 percent to 2.75 percent and the one-year lending rate from 6 percent to 5.6 percent. Saxo Bank’s Head of Equity Strategy, Peter Garnry says that the positive impact of the rate cut is already clearly evident in Chinese stocks listed in Hong Kong.
China Life Insurance Co. was upgraded to a ‘buy’ by China International Capital Corp. directly after the rate cut was announced. Peter notes that shares in the company are now up 20 percent, as investors speculate that the rate cut will stimulate growth. Financial companies have experienced the largest gains so far, but the rate cuts impact has been widespread with China Mobile up around 2 percent, China Petroleum & Chemical Corp up almost 4 percent, Haitong Securities Co. up 5 percent and China Merchants Property Development Co. up 10 percent. Investors have viewed this as a beneficial move for Chinese banks and life insurers whom are particularly sensitive to interest rates. The PBoC made it clear in its announcement that this rate cut was established due to increasingly high financing costs, not due to the slowing Chinese economy.
Investors have been calling for a rate cut for months as the world’s second largest economy shows signs of slowing growth. The country has been hindered by a property slump and weak industrial output over the past year with production rising at the slowest pace in five years. Furthermore, Chinese GDP for 2014 is forecasted to be 7.4 percent, the slowest level since 1990.
