China Cuts Benchmark Rates
China cuts benchmark rates. China cut benchmark interest rates for the first time since July 2012. The one-year lending rate was reduced by 40 basis points to 5.6%, while the one-year deposit rate was lowered by 25 basis points to 2.75%. This unexpected move suggests that authorities want to mitigate the potential risk of a financial crisis caused by slowing growth.
What does a rate cut mean? In the past, as chart of the week confirms, a reduction in interest rates would have resulted in higher credit growth. However, we do not think that will be repeated this time, given China's already high debt and high interest servicing burden as a percentage of Gross Domestic Product (GDP); and the central bank’s strict control over credit quotas.
What would be the impact? A short-term positive for China-sensitive assets such as commodities and property companies. Corporations and mortgage borrowers should also benefit through lower interest payments, but investors should not get carried away. We doubt this move alone would prevent a shift towards a slower pace of growth as China rebalances. The debt burden is large and excess capacity in many industries, particularly the real estate sector, still needs to be addressed.
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Emerging market investments involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, from economic or political instability in other nations or increased volatility and lower trading volume. Please call +1 888 800 4347 or click here access a prospectus online. Investing involves risk, including possible loss of principal.
Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses, which could reduce returns. Indexes are unmanaged and one cannot invest directly in an index. Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance data may be higher or lower than actual data quoted. For the most current index performance data please call + 1 888 800 4347.
The content of this material is presented for general information purposes only. The statements and opinions expressed are those of the author and are as of the date of this material. All information is historical and not indicative of future results, and subject to change. Readers should not assume that an investment in the securities mentioned above was or would be profitable in the future. This information is not a recommendation to buy or sell. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and it should not be relied on as such or be the basis for an investment decision. This material may include estimates, projections and other "forward-looking statements". Emerging Global Advisors, LLC assumes no duty to update any such statements. Due to numerous factors, actual events may differ substantially from those presented. Past performance does not guarantee future results.
EGA and EGShares Funds are distributed by ALPS Distributors, Inc. Emerging Global Advisors acts as the investment advisor to the EGShares Funds. ALPS and Emerging Global Advisors are unaffiliated entities.
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