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China shares volatile after rate cut

WT24 Desk

Chinese shares zig-zagged in volatile trade as traders gauged the effect of a fresh rate cut by the central bank.  Shortly before closing, the mainland’s benchmark Shanghai Composite was down 1.1% at 2,929.17, after veering in and out of negative territory,reports BBC.

It had fallen about 16% this week, rocking global markets.  On Tuesday, China’s central bank cut its key lending rate by 0.25 percentage points to 4.6% in a bid to calm stock markets after the past days’ turmoil.

The dramatic losses and volatility in China have shattered investor confidence and led to sharp falls in Asia and the US over the past days.  The interest rate cut was the fifth by the People’s Bank of China since November last year.

A rate cut will make it cheaper for banks to borrow from the central bank and will in turn make it easier for businesses and private people to borrow money from those banks.

The BBC’s Celia Hatton in Beijing explains that the move is aimed at a long-term effect on the growth of the Chinese economy, rather than at having an immediate impact on investors.

“They’ve already said they are not going to intervene on a day-to-day basis in the stock market, but they are going to focus their attention on growing the real economy in the long term.”

“They hope that this will convince investors that the Chinese economy might be slowing down, but is not in for a hard landing, and that this will over time convince investors and stabilise the market,” our correspondent said.

Hong Kong’s Hang Seng index followed Shanghai’s lead for most of the morning but then traded flat at 21,416.09 points.  The deeper problem is that now the year-long stock bubble has burst, investors are confronting the economic fundamentals.

China has embarked on a huge transition away from its previous investment-led growth model, and although the government warned that transition would be painful, the pain is already far worse than it bargained for, undermining the credibility of its 7% growth target and deepening political unease.

A dramatic devaluation of the currency a fortnight ago, coming on top of the summer’s bungled stock market rescue, has left Beijing looking uncertain and accident prone. The stock market may well have further to fall.

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