Chinese stocks listed in Hong Kong popped today. This follows a series of rate cuts by China’s central bank that sparked a rally in a wide range of companies. The Hang Seng Index rose a total of 3.4% in Thursday trading. That’s a stark reversal from last year, when the benchmark index had its worst performance in a decade. As investors likely know, 2021 brought regulatory fears as Beijing officials cracked down on publicly traded tech firms.
The Hang Seng’s year-to-date gains stand in contrast to the S&P 500’s year-to-date decline of 6%. Yesterday, the technology-laden Nasdaq officially entered correction territory when its decline for the year reached 10%.
What Happened With Chinese Stocks
China’s central bank lowered mortgage lending rates as officials step up efforts to stimulate the slowing economy. This comes as China faces a new wave of Covid-19 infections and corresponding lockdown measures. The rate cuts also come as China’s property sector continues to struggle with defaults, and as the country prepares to host the winter Olympics in Beijing beginning on Feb. 4. Specifically, the People’s Bank of China lowered its one-year loan prime rate by 10 basis points to 3.7% from 3.8%. It reduced the five-year rate from 4.65% to 4.6%.
The cut to these loan prime rates followed surprise reductions by China’s central bank earlier this week to the short- and medium-term lending rates. With the property sector’s downturn worsening and the fast-spreading omicron variant hurting consumer spending, many analysts say China’s rate cuts are needed. This may be true even as the U.S. begins to tighten monetary policy and American markets prepare for what multiple interest rate increases from the Federal Reserve this year. The U.S. inflation rate is currently at its highest level in 40 years.
Why It Matters
The interest rate cuts in China show that the world’s two biggest economies are on divergent paths. The U.S. is grappling with rising consumer prices, labor shortages and supply chain constraints while China is trying to boost economic growth.
For Chinese stocks that are widely held by American investors, such as JD.com, the interest rate cuts provide a much-needed boost after a year of steady declines. In the past 12 months, JD stock has declined 20% in New York. Shareholders are no doubt hoping that the interest rate cuts will be the catalyst needed to get Chinese stocks moving higher once again.
Investors clearly like the interest rate cuts. This is in contrast to the looming threat of higher interest rates in the U.S. that has given markets fits to start the year.
Going forward, continued rate cuts by China’s central bank could make Chinese stocks, particularly high-value technology ones, more attractive to investors. Already at rock-bottom prices, the rate reductions in China provide investors with one more reason to load up on Chinese equities as we begin 2022.
On the date of publication, Joel Baglole held long positions in BABA and BIDU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.