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James Hyerczyk
Asian Equity Markets

The major Asia Pacific stock markets are trading higher for a second session this week. Traders are following the bullish lead of Wall Street from Monday, but also getting help from a move by the People’s Bank of China (PBOC), to make cheaper loans available to businesses. In other news, the Reserve Bank of Australia released the minutes from its last monetary policy meeting.

At 02:31 GMT, Japan’s Nikkei 225 Index is trading 20647.40, up 84.24 or +0.41%. Hong Kong’s Hang Seng Index is at 26300.72, up 8.88 or +0.03% and South Korea’s KOSPI is trading 1947.52, up 7.62 or +0.39%.

China’s Shanghai Index is at 2888.72, up 5.62 or +0.19% and Australia’s S&P/ASX 200 is at 6511.60, up 44.20 or +0.68%.

China Announces New Loan Prime Rates

The PBOC announced its new loan prime rates (LPR) under a new mechanism that was unveiled over the weekend. Some analysts are calling the move the equivalent of a guided rate cut. The new 1-year LPR was set at 4.25%, as compared to 4.31% previously. The 5-year LPR was at 4.85%.

The move by the PBOC is designed to steer corporate borrowing costs lower and support a slowing economy. Hence, the term “guided rate cut.”

The LBR was originally created to allow commercial banks to offer more favorable interest rates to their best customers, like the U.S. prime rate. It was also intended to better reflect market demand for funds than the benchmark the PBOC sets. However, the commercial banks have been reluctant to cut rates in order to protect their profits.

Under the reforms announced on Saturday, the new LPR will be linked to rates set during open market operations, namely the PBOC’s medium-term lending facility (MLF), which is determined by broader financial system demand for central bank liquidity.

Basically, it’s another way for companies to get cheaper money, which should be a positive for the economy and China’s stock market. In theory, the MLF rate could follow U.S. rates, which means if the Fed cuts rates, MLF rates will follow lower.


Reserve Bank of Australia Minutes

The RBA monetary policy minutes showed that the central bank would consider more easing if data showed “this was needed to support sustainable growth in the economy and the achievement of inflation target over time.”

No surprise there since the central bank already said in its August monetary policy statement, it would make lower adjustments to rates “if needed”.

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