Choppy stocks begin to calm after China rate cut

Shanghai shares rose on Wednesday, with early choppy trading easing after an interest rate cut in China began to soothe fears about stalling growth and arrest the crisis that has rattled global markets.

China's central bank reduced interest rates and slashed the amount of money banks need to hold in reserve on Tuesday -- its second such double move in two months -- in a bid to bolster its economy and end the worst stock market rout in almost two decades.

China is the world's second-largest economy and top trading nation, so signs it is slowing have sent financial markets into turmoil, particularly when the US Federal Reserve is expected to raise interest rates in the next few months.

The cuts initially fuelled a rebound in global equities, with European shares surging after their heaviest losses since the 2008 financial crisis on Monday as panic about China gripped world markets.

But the optimism fizzled by the end of US trading, with Wall Street finishing in negative territory after strong early gains, as the spectre of a hard landing in the world's number two economy returned.

Despite volatile early trading in Shanghai that saw China's benchmark index fall as much as 3.85 percent and rise as much as 1.24 percent, Phillip Securities analyst Chen Xingyu said some calm had returned.

"In all, the central bank's move has helped with the market sentiment today, despite the current volatility," he told AFP.

Shanghai shares were up 0.80 percent, or 23.79 points, at 2,988.76 by the break.

Other Asian share markets also wobbled, with Seoul up and Tokyo rebounding after its worst two-day slump since 2011, while Sydney fell and Hong Kong edged higher by the break.

Zhang Yanbing, an analyst from Zheshang Securities, said the central bank's cuts had tamed the "panic sentiment" that had gripped Shanghai, but warned: "There will still be fluctuations as views towards the market's prospects are divided."

- 'Full-blown crash' -

Chinese stocks have lost more than 40 percent of their value since a year-long, debt-fuelled rally collapsed in June, prompting Beijing to unleash unprecedented measures to support the market -- including using state-backed vehicles to buy up shares.

While the slump in Shanghai may have a limited impact on the broader economy, it reflects dissipating confidence among investors that the sky-high valuations of quoted companies are warranted.

Some analysts see Beijing's handling of the market slump as a further litmus test of the government's ability to guide the economy to a more market-oriented model after the shock devaluation of the yuan two weeks ago.

"If problems on China's financial markets and real economy deepen, and the authorities fail to contain the situation, a full-blown financial and economic crash in China could ensue," said Christophe Donay, chief strategist at Pictet Wealth Management.

"This is currently the biggest risk for the global economy and financial markets."

China's central bank on Tuesday warned that "economic growth rate remains under pressure", adding the cuts were meant in part to "support the real economy to continue to develop healthily".

The People's Bank of China (HKSE: 3988-OL.HK - news) (PBoC) cut its benchmark lending and deposit interest rates by 0.25 percentage points each and its reserve requirement ratio by 0.50 percentage points.

The bank has now cut interest rates five times since November in a bid to spur the slowing economy as concerns mount it may miss its seven percent growth target for the year.

But international investors said more would need to be done to reassure markets, especially as the US is expected to raise interest rates for the first time in nearly a decade by the end of the year.

The head of the PBOC's research unit said expectations for a rate rise in September had been the "trigger" for the wild swings in world markets and warned the US central bank to wait, Xinhua reported.

"A circuit-breaker is needed to dispel excessive pessimism and restore confidence," Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong, told Bloomberg News.

"Further support measures in the coming weeks and months will be needed."