Shares rebounded across Asia yesterday but the long-term effect of the US interest rate cut on the global economy and stock markets remains unclear, said analysts.

 

To shore up a struggling economy, the US Federal Reserve on Tuesday slashed the key federal funds rate by 75 basis points to 3.5 percent - the largest cut since 1984 - a week ahead of its scheduled meeting.

 

Yesterday, the Shanghai Composite Index gained 3.14 percent while Japan's Nikkei 225 Stock Average added 2 percent.

 

The biggest Asian advance came in Hong Kong, where the Hang Seng Index surged 10.7 percent to reach 24090, the steepest point gain in history - after its 13.6 percent dive in the previous two days.

 

India's Sensex jumped 6 percent, but European markets dropped.

 

In New York, stocks slid at the opening on continued recession worries. The Dow Jones industrial average was down 190 points, or 1.6 percent, at 11780.

 

Chen Xingdong, chief economist of BNP Paribas Peregrine Securities in Beijing, said: "The more-than-expected 75 point rate cut by the US Fed provided an initial boost to the market." The market had widely anticipated a 50 basis point cut.

 

"But the long-term trend of the markets and the global economy is yet to become clear," he told China Daily.

 

The rate cut points to policymakers' deepening worries about US economic prospects, which shows the situation is very serious, he said.

 

Chen said the market gloom may linger for some time. "The subprime crisis has affected the soundness of the US financial system and it will also take a long time for the tumbling housing market to recover."

 

If the US economy weakens, the global economy may suffer as the former accounts for about 30 percent of the global economy, said Wei Weixian, economist with University of International Business and Economics.

 

"But we should not rush to such a conclusion," Wei told China Daily.

 

The US Fed is expected to further cut the key interest rate twice in the upcoming meetings to 2.5 percent.

 

If that happens, and is accompanied by stimulus measures from other countries, he said, things may not be that "awful" for the global economy.

 

The US Fed rate cut has narrowed the room for Chinese policymakers to further raise the interest rate to tackle inflation problems and also increase pressure on yuan revaluation because it will lure more speculative capital, said Ma Hongman, a Shanghai-based economist.

 

Stephen Green, Standard Chartered Bank's head of research in China, agreed. "The Fed's move obviously creates more pressure on China's central bank and complicates our view that it will continue to hike bank interest rates."

 

China's economic growth will face downward pressure, warned Chen from BNP.

 

Apart from the expected slowdown in the global economy, which will drag down China's exports, the tightening macroeconomic policies in recent years have built pressure on this year's economic growth, he said. "This year's tightening will worsen the situation."

 

(China Daily January 24, 2008)