China fears and global growth doubts grip international markets

Madrid, August 23

Markets will be watching for China’s next move as signs of a slowdown in the world’s second-largest economy stack up, raising expectations it will act to stoke growth.

A looming snap election in Greece and a closely watched conference hosted by the Federal Reserve in the United States are also likely to keep investors on their toes next week, in particular as they look for hints on when the US will raise interest rates.

Fears that Chinese growth is weakening, dragging down the global economy with it, are already hammering commodities and world stock markets.

Both tumbled on Friday after a survey showed Chinese manufacturing slowed the most since the global financial crisis in 2009 — adding to other worrying clues about the country’s health, including its falling exports.

China devalued the yuan earlier in August, by pushing its official guidance rate down two per cent. The central bank has said there was no reason for the currency to fall further, but investors are also bracing for further interest rate cuts.

“It will be all eyes on the Chinese authorities for any further policy support steps, alongside the People’s Bank of China yuan fixings and trading swings,” analysts at Investec Economics said in a note to clients.

China is also widely expected to relax reserve requirements ratios for its banks again in the coming months, a measure intended to spur lending by reducing the cash they need to hold. It is trying to keep its economy on course to grow seven per cent in 2015 — its slowest pace in a quarter of a century.

“We continue to expect a total of 100 basis points of reserve requirement ratio cuts by end-2015, with the first cut likely to take place within the next two weeks,” economists at Standard Chartered said.The cash reserves ratio has already been cut three times this year.

By the end of next week attention may shift away to the Rocky Mountains, where policymakers are due to gather from August 27-29 for the Fed’s conference of central bankers, finance ministers, academics and financial market participants in Jackson Hole.

Fed Chair Janet Yellen is not expected to attend, raising the prospect that other Fed officials may be more tight-lipped about the likelihood of the first rate increase in almost a decade, some analysts said.

The prospect of an increase as soon as September receded this week as the Fed released minutes of the July meeting. They gave no clear signals as to the timing of such a move — which would affect markets across the world and could cause more pain for emerging market assets, already being hit by China’s woes.