LONDON — Shrugging off jitters about China, Europe’s stock markets began to recover the past week’s losses Tuesday, even as exchanges in Shanghai and Tokyo continued their downward spiral.
The FTSE MIB in Milan rose 3.1 percent to 21,085.84, while the CAC 40 in Paris gained 3.5 percent to 4,537.85 and the DAX in Frankfurt was up 3.2 percent to 9,953.79. The FTSE 100 in London rose 2.6 percent to 6,051.96.
Markets further rebounded after a late-in-the-day announcement from China’s central bank, the People’s Bank of China (PBoC), that it would cut its main interest rate by 25 basis points to 4.6 percent after two days of market chaos. The PBoC also cut banks’ reserve requirement ratio by 0.5 percentage points. The changes go into effect on Wednesday. Investors had anticipated a cut over the weekend.
This is the fifth time in nine months rates have been cut.
“Downward pressure still exists on Chinese economic growth,” the PBoC said in a statement released on its Web site. “Promoting steady growth, adjusting economic structure, promoting reform, benefiting people’s livelihood and risk prevention are all still arduous tasks.”
The main purpose for lowering rates, the PBoC said, “is to continue to play a good role in guiding the benchmark interest rate, reduce the social cost of financing and to promote and support the sustainable and healthy development of the real economy.”
Europe’s markets had all suffered heavy falls in the wake of Asia’s plummeting stock market over the past week, as investors grew concerned over China’s growth prospects. On Tuesday, the Shanghai Stock Exchange Composite Index had tumbled 7.6 percent to 2,964.97, while the Nikkei 225 in Tokyo was down 4 percent to 17,806.70. Hong Kong’s Hang Seng Index had edged up, finishing up 0.7 percent to 21,404.96.
Fashion, luxury and retail stocks mirrored the European gains.
Those that climbed the most included French Connection, 12 percent to 0.31 pounds; Carrefour, 4.5 percent to 28.22 euros; Safilo Group, 4.3 percent to 10.53 euros; and Richemont, 3.6 percent to 71.35 Swiss francs.
The only fashion stocks that lost ground were those listed in Asia: Prada, 1.2 percent to 32.40 Hong Kong dollars; and Esprit, 3 percent to 6.06 Hong Kong dollars.
At 10:46 a.m. CET, the pound traded for $1.57, while the euro went for $1.15, the Swiss franc for $1.06 and the Hong Kong dollar for $0.13.
The Shanghai Composite Index now sits below the key psychological level of 3,000, reflecting the selloff that has markets around the world spooked about China’s economic prospects.
Tuesday’s fall in Shanghai followed Monday’s 8.5 percent decline. In total the index has lost approximately 40 percent of its value since a mid-June peak.
“The recent turmoil has left even the most hardened trader gasping for air. And there’s probably more to come,” Frederic Neumann, HSBC’s co-head of Asian economics research, wrote in a note to clients.
Tech and energy shares have been worst hit in recent days, with banking the only major sector to escape relatively unscathed.
China’s yuan again dipped against the dollar today after closing at its weakest level since 2011 on Monday.
Analysts said the gains in markets outside China reflect that volatility with mainland exchanges has relatively little impact outside Chinese borders.
“People are taking a step back and saying, ‘Hey, wait a minute, this does not really impact us,’” said Christopher Balding, an associate professor of finance and economics at Beijing University’s HSBC Business School’s Shenzhen campus. “There’s a certain degree of rationality in a lot of these markets.”
Despite Western media reports that China’s biggest search engine, Baidu, was censoring news of the stock market, Baidu’s forums were crowded with Chinese Web users sounding off on the issue on Tuesday.
Commentators were both incredulous and angry.
Investors have been nervous about the perceived lack of response from the central government.
The government has publicly backed away from policy interventions in recent weeks, with the stock market regulator saying on Aug. 14 it would only intervene when there was “unusual volatility” or “systemic risk”.
There have been other signs of behind-the-scenes maneuvering to help stem the flow.
At least eight listed Chinese companies released statements on Monday night to say their directors were buying more shares, indicating there is still pressure from the government on companies to help prop up the ailing stock market.
Over the weekend, Beijing announced that it would allow its main state pension fund to invest in markets for the first time. Yet, according to Balding, investors saw this announcement as a frail attempt to instill investor confidence and also an indicator that the government will do little else to intervene, and thus, could have prompted the sharp selloffs this week. Balding said the pension fund announcement would take at least a year to really have much of an impact.
“Chinese investors are savvy about reading between the lines,” Balding said. “They didn’t see this as actually doing anything for the stock market so started yanking things off the table. That’s the closest thing I can come up with as to what precipitated the Monday selloff. It was almost seen as a deceptive attempt to shore up some sort of confidence.”
Another indicator was a report on Tuesday from China’s economic planning department, the National Development Reform Commission (NDRC), acknowledging “downward pressure” on the economy, but talking up the growth of the country’s service sector and rising incomes.
“With the series of policies released by the government, it is expected China’s economic growth will remain stable in the second half,” the NDRC said. “There is a positive long-term trend.”
Beijing is targeting growth of 7 per cent this year, which would be its slowest growth rate since 1990. Other data indicate the world’s second largest economy is weakening. A flash PMI at 47.1 percent indicates contraction in the manufacturing sector for August. Debt levels remain high at over 220 percent of GDP while equity funding has been stalled by the stock market crash. Industrial production fell to 6 percent in July, some of the weakest numbers on record.
Meanwhile, analysts say consumers are being hit by the depreciation of the yuan, widespread job losses, particularly in manufacturing, and stagnating incomes that do not match rising housing and other prices in major cities.
UBS economist Tao Wang said in a research note the weak market would probably shave off up to half a percent from growth in the second half.
“We see downward risk to our 6.8 per cent growth forecast for 2015, but believe that the recent recovery of property sales has reduced the risk of a sharp hard landing in the real economy this year,” she said.
Meanwhile, the latest data from Global Blue suggests Chinese tourists continue to spend lavishly. In a research note detailing July results, Barclays said Chinese spending in increased 71.2 percent that month in Europe, and 83 percent in the rest of the world, the latter figure suggesting “high volumes of middle-class Chinese spending in Asia, in particular Japan.”
By contrast, spending by Russian tourists declined 32.4 percent, while other nationalities grew by around 23 percent. July saw an overall 31.9 percent increase in global tourism.