Chinese ETFs gain after unexpected central bank rate cut

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China’s country-specific exchange-traded funds gained strength after the People’s Bank of China executed an unexpectedly large cut in its benchmark benchmark mortgage rate in a bid to revive the ailing housing sector and to support the faltering economy.

Friday, the iShares MSCI China ETF (NASDAQ: MCHI) increased by 0.3% and the Xtrackers CSI 300 China A-Shares ETF (ASHR) gained 1.6%.

The People’s Bank of China on Friday cut its benchmark rate on loans of five years or more to 4.45% from 4.6%, the largest single rate cut since the bank began monitoring this market segment. in 2019, reports the Wall Street Journal. By comparison, the central bank had previously cut 0.1 percentage points at the start of 2020.

The rate change was also unexpected as the central bank left unchanged another key rate applied to loans from a medium-term lending facility that funnels liquidity to commercial banks earlier this week. On Friday, the PBOC also added that it would keep the benchmark one-year lending rate unchanged at 3.7%.

The latest move “is an even stronger signal that instead of going for broad-based monetary easing, they want to do more targeted easing,” Tommy Wu, chief China economist at Oxford Economics, told the WSJ.

Senior officials have vowed to tackle a slowing economy that has been weighed down by COVID-19 outbreaks and lockdowns, which have hampered economic activity. Market participants also hoped Friday’s move was a response to Chinese Premier Li Keqiang’s bid to decisively step up policy adjustments and let the economy quickly return to normal, Reuters reports.

“Today’s reduction in the five-year prime rate should help revive home sales, which have gone from bad to worse recently,” Julian Evans-Pritchard of Capital Economics said in a note.

“But the absence of any one-year LPR reduction suggests that the PBOC is trying to maintain targeted easing and that we should not expect a full-scale stimulus of the kind we saw in 2020.”

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