China pulls rate cut trigger before Fed, unsettling yuan
July 22 (Reuters) - China's rate cuts on Mondaytriggered negative reactions in domesticstocks and the yuan. The easing was expected, but the timing was not, and the widened rate differential with the U.S.might have unsettled investors.
The central bank cut the seven-day reverse repo rate by 10 basis points, followed by a lowering of the one-year and five-year loan prime rates. Shanghai stocks slid 0.9% on the glass-half-empty view that the economy may be deteriorating faster than officials admit.
While consensus has been strong that China needs to ease policy, most expected Beijing to wait for the U.S. Federal Reserve to cut rates, so as to minimize fallout for the yuan.
USD/CNY rose to 7.2750from Friday's close of 7.2620, implying a 0.2% weaker yuan, as the People's Bank of China kept the daily midpoint largely unchanged. The 10-year yield gap with the U.S.widened marginally to nearly -200 basis points.
China is undeniably getting more serious about economic revival, with measures announced over the weekend to support private firms and boost equipment upgrades and consumer goods trade-ins. The easing of the five-year LPR might unlock more property sector purchases, if more is done to lift domestic investor sentiment.
Pulling monetary policy levers can only do so much if consumers still aren't willing to spend. China now needs to convince citizens that the worst is over, either by creating more jobs, or by widening the social security net.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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