Recently, China’s central bank cut interest rates twice within three days to inject liquidity into the market. Despite these moves, China’s stock markets responded negatively, a sign of disappointment, especially after the recent third plenary session of the 20th Central Committee of the Chinese Communist Party (CCP).
However, these measures failed to boost investor confidence. The Shanghai Index, for instance, fell to 2,964.22 points on July 22, dropped further to 2,901.95 points on July 24, and was at 2,891.85 as of July 29.
Davy Jun Huang, a U.S.-based economist and former columnist for China’s state media CNTV, said that the recent conclusion of the third plenary session contributed to the bearish sentiment.
The third plenary, or plenum, held every five years, is often used to introduce major reforms and address critical issues. Historically, it has been the stage for landmark policy changes, such as Deng Xiaoping’s introduction of the “reform and opening up” policy in 1978, which transformed China’s economy.
Mr. Huang said that the underlying problems in China’s economy are too deep to be addressed by mere interest rate cuts, which he believes are too minimal to make a difference.
China Cuts Rates Before US Fed
Li Hengqing, a researcher at the Institute for Information and Strategic Studies in Washington, told The Epoch Times that the PBOC usually watches the U.S. Federal Reserve closely, looking for opportunities to adjust interest rates accordingly.“When the Fed hinted at possible rate cuts, the PBOC moved quickly, driven by significant economic challenges such as the real estate collapse, banking system risks, local government debt, company closures, high unemployment, and slowing exports. These problems require urgent measures to release liquidity and stimulate the economy,” he said.
Mr. Li added that the modest 0.1 percent rate cut indicates the PBOC’s constrained position. In the United States, financial experts typically consider a rate change of 0.27 percent or more impactful for credit and investment expansion. The PBOC’s minor adjustment failed to reassure the market, leading to stock market declines and concerns over maintaining key index levels.
After the first rate cut, the market reaction was negative. On July 24, the Shanghai–Hong Kong and Shenzhen–Hong Kong Stock Connects saw a net sell-off of 2.276 billion yuan (about $314 million) in northbound capital, indicating bearish sentiment.
Northbound capital refers to investment from Hong Kong into mainland China’s stock markets through the two stock connect programs. A net selling trend indicates foreign investors are cautious or negative about China’s economic prospects.
Mr. Li said China’s economic woes require more than interest rate cuts and liquidity injections.
“A true market economy requires a rule-of-law society where power is restrained. However, the current regime appears to be reverting to Mao-era economic planning that contradicts these principles,” he said.
