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Chinese Market Closes Down Despite Rate Cuts

The Chinese market crisis has been described as a loss of investor confidence prompted by Beijing’s search for innovative new ways to control China’s economy.

Now that they’ve resumed the old tried-and-true pump-priming methods, the theory goes, investors would be reassured. The more dire analysts warned that Beijing might have lost investor confidence on a broader and deeper basis.

A bit of fuel for the fires of pessimism was provided by Wednesday’s news that the Shanghai Composite index fell another 1.27 percent, even after China’s central bank cut its key lending rate by 0.25 percent on Tuesday. The Hang Seng index in Hong Kong also closed 1.5 percent lower.

The BBC says that makes a net 16 percent drop for the Shanghai Composite this week. “The dramatic losses and volatility in China have shattered investor confidence and led to sharp falls in Asia and the US over the past days,” writes BBC, adding that European markets were down 0.4 percent as the lunch hour approached on Wednesday, following a Tuesday rally.

BBC Business Editor Robert Preston thought Tuesday’s news from the Chinese market was, in some ways, even more disturbing than Monday’s:

Because if share-price gains could not hold after the significant monetary easing by China’s central bank, then mistrust about the true state of the world’s second largest economy (actually the number-one economy on the purchasing-power-parity measure of GDP) has become very pronounced indeed.

And another thing, the Chinese interest rate cuts will exacerbate the phenomenon that has caused so much stress in so many different global markets, from commodities, to foreign exchange, to stocks and bond – the fall in the Chinese currency, the RMB, since it was allowed by Beijing to float more freely on 11 August.

Even with vast amounts of coercive power deployed against the laws of supply and demand, on a long enough timeline, they always win. Currency manipulations and stock-market games can only simulate the true prosperity of selling goods and services to willing buyers who can afford to pay for them.

The best thing China, like every other big government/corporate player, has going for it is that investors want to believe a tale of modest economic downturn, fixed with a bit of currency manipulation. International business interests don’t want big customers to go bankrupt. It’s difficult for any outside agency to determine, with confidence, what’s actually happening in China, which gives Beijing a great deal of latitude to tell the financial world what it wants to hear. We’ll soon enough know, both figuratively and literally, if either local or global investors are buying what China is selling.

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