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China-related exchange-traded funds tumbled on Tuesday after China’s central bank cut benchmark lending rates but spurred broader market disappointment that Beijing’s monetary stimulus was not sufficient to support the nation’s slowing post-pandemic economic recovery.
The iShares MSCI China ETF
MCHI,
finished 4.1% lower on Tuesday, logging its worst day of 2023 and the biggest one-day percentage drop since October 2022, according to Dow Jones Market Data.
The Invesco Golden Dragon China ETF
PGJ,
which tracks the American depositary shares of companies based in China, tumbled by 4.9%, while the KraneShares CSI China Internet ETF
KWEB,
which offers exposure to Chinese software and information technology stocks, was off 5.6%, according to FactSet data.
The People’s Bank of China (PBOC) Tuesday cut two more key lending rates for the first time in 10 months in a bid to support the country’s struggling economic recovery. The one-year loan prime rate, or LPR, was cut by 10 basis points to 3.55% and the five-year LPR, or the benchmark for mortgage rates, was lowered by the same amount to 4.2%, according to the PBOC.
See: Chinese yuan at 6-month low after surprise policy rate cuts, further monetary easing ahead
The interest rate cuts are the latest in a string of moves by Beijing to shore up a wobbly post-Covid economic recovery. The bank trimmed its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% last week. Meanwhile, the one-year medium-term lending facility, or MLF, was cut to 2.65% from 2.75%. The MLF rate usually serves as a guide to the benchmark LPR.
While Tuesday’s rate cut was widely expected after a flurry of economic data, including May’s industrial production and retail sales report, missed expectations, market participants had predicted a bigger reduction in the five-year LPR rate, which impacts the pricing of longer-term loans such as mortgages.
Reductions on lending rates “are pretty much a given” as the LPR is set by applying a mark-up to the MLF rate, said economists at Capital Economics led by Julian Evans-Pritchard, head of China economics. However, they said the cut to the 5-year LPR should be larger given the PBOC’s intention to support the property market.
“These cuts will lower the cost of new loans, as well as interest payments on existing loans (though not always immediately). That should offer some modest support to economic activity. But we think it is unlikely to drive a sharp acceleration in credit growth, given still weak credit demand,” they wrote.
The PBOC’s move came at a time when other major central banks around the world, despite having different political regimes and economic conditions, are still in a monetary tightening cycle to curb inflation.
Several Wall Street banks have cut their 2023 gross domestic product (GDP) growth forecasts for China recently, with UBS last week trimming its 2023 growth expectations to 5.2% from 5.7%. JPMorgan last week cut its China outlook to growth of 5.5% from 5.9%, due to a “loss of recovery momentum in domestic activity and growing concerns of deflation.”
Over the weekend, Goldman Sachs downgraded their 2023 full-year real GDP growth estimate to 5.4% from 6% and their 2024 growth forecast to 4.5% from 4.6%, citing a second straight month of weak data in May and limited stimulus options for the Chinese government to further boost the economy.
The Chinese yuan
CNHUSD,
traded at 7.18 per dollar on Tuesday after the rate decisions, slipping toward a 7-month low and on the verge of breaching the keenly watched 7.2-per-dollar level, according to FactSet data.
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Meanwhile, the U.S. stock market ended lower on Tuesday as investors came back from the Juneteenth holiday weekend. The Dow Jones Industrial Average
DJIA,
was off 245 points, or 0.7%, to end at 34,053. The S&P 500
SPX,
dropped 0.5% and the Nasdaq Composite
COMP,
shed 0.2%.
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