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Global Markets Reeling from Lower than Expected Chinese Economic Growth and Tumbling Oil Prices

After two days of stock market turmoil, the People's Bank of China cut its main lending and deposit rates by 0.25 percentage points to 4.6% on Tuesday to 4.6% and 1.75% respectively.

It is the fifth interest rate cut since November meant to fend off concerns about its stallng economy and will take effect on Wednesday.

The central bank also said it would require large banks to keep less cash in reserve, a move that should boost activity by making it easier and cheaper for the banks to lend money.

The move has boosted European share prices further, with the FTSE 100 in London jumping 3.3% after the China move.

In Germany, the Dax was up by 4.4% and in Paris, the Cac was ahead by 4.6%.

On other European markets, Lisbon, Madrid, Moscow and Milan were all sharply higher.

The moves follow a dramatic crash in Chinese stock markets, which panicked investors around the world on Monday. Worries about the pace of growth in the world's second biggest economy were fueling the selloff.

JP Morgan applauded the move: "China's decision to cut... will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the... cut in boosting the domestic stock market."

The global sell-off has been driven by fears that China's slowing growth means less business for everyone else.

The central bank acknowledged the weakness in the Chinese economy - and the need for intervention.

 "At this time, China's economy is still facing downward pressures ... global financial markets have also seen great volatility recently," the central bank said on its website. "As such, there is a need to use monetary policy tools ... to help support a stable and healthy development of the economy."

China has already taken several steps to control the crisis. The government gave money to brokerages to buy stocks -- and ordered company executives not to sell their shares. New company listings were suspended.

 Economists were expecting Beijing to act, especially after a key gauge of China's manufacturing activity tumbled to its lowest level in 77 months last week. The massive selloff on Monday has been partly blamed on China's inaction over the weekend.

"Simultaneous interest rate and required reserve ratio moves are unusual -- a sign that policymakers want to deliver a strong message," analysts from Capital Economics said in a note.

The move helped to push European markets and U.S. futures up Tuesday, but some experts say it might not be enough to deal with the real issues.

 "The cut of interest rates ... may calm the stock market turmoil, but does not address the underlying causes," said Kamel Mellahi, Warwick Business School professor.

The benchmark Shanghai Composite index extended its losses on Tuesday, falling 7.6%. That follows a massive tumble on Monday of 8.5%, the worst one-day drop since February 2007.


The benchmark Shanghai Composite declined 7.6%, while the smaller Shenzhen Composite shed 7.2%. The Shanghai index has now crashed 42% from its June 12 peak.

After Chinese markets closed, Beijing launched new stimulus measures to boost the country's flagging economy. That sent U.S. futures and European markets higher.

Economists were expecting Beijing to act to try and prop up stocks. The central bank injected 150 billion yuan ($23.4 billion) into the financial system on Tuesday, but that was modest compared with intervention efforts seen in June and July.

Markets fared better elsewhere in Asia. After starting the day in the red, Australian and South Korean shares closed in positive territory. Only Japan's Nikkei lost ground again, falling 4%.

 Major European indexes extended gains following China's rate cut to more than 3%, after falling about 5% on Monday. Confirmation of solid growth and resilient business confidence in Germany, Europe's biggest economy, were helping.

Wall Street was also poised for a positive open after Monday's very rough session. Following an unprecedented 1,000-point decline at the open Monday, the Dow closed with a loss of nearly 600 points.

Three factors continue to trouble markets:

1. Concerns that China's economy is slowing faster than analysts had anticipated.

2. Uncertainty over when the U.S. Federal Reserve will raise its benchmark interest rate.

3. The effect of exceedingly cheap oil -- crude is now trading below $40, its lowest point in more than six years.

The focus on China has increased in recent days, especially after a key manufacturing index hit a 77-month low.

But some economists say global investors are overreacting to China's economic risks.

"The collapse of the equity bubble tells us next to nothing about the state of China's economy," said Mark Williams, chief Asia economist at Capital Economics. "In fact, recent data have been more positive than the headlines might suggest, with large parts of the economy still looking strong."

Wang Jianlin, Asia's richest man has lost about $13 billion in China's latest stock market crash.

Since Chinese stocks peaked in June, shares of Wang's publicly traded companies have tumbled in Hong Kong and Shenzhen -- eroding his personal wealth. He lost a whopping $3.6 billion in just the past two trading sessions -- roughly a third of his total losses this summer.

 Wanda Dalian Commercial Properties plummeted 38% since June 12, slashing nearly $9 billion off the value of Wang's stake; Wanda Cinema Line fell by 36%, for a loss of $4.2 billion; and Wanda Hotel Development shares plunged by 49%, wiping another $60 million away, according to an analysis of stock exchange data and filings by CNNMoney.

Wang recently overtook Hong Kong billionaire Li Ka-Shing as Asia's richest man, according to a ranking released last week by the Hurun Report. The report estimated Wang was worth $42.6 billion.

Even before the crash, Wanda Cinema was in hot water, experiencing volatile price swings and even a trading suspension for about two months. The cinema and commercial property firms both debuted on the market in the past year, boosting Wang's wealth.

Wang spent 16 years as a soldier before achieving billionaire status by amassing an empire as founder of the Dalian Wanda Group, a conglomerate that operates in real estate and entertainment.

 His ambitions run far and wide, and recent investments have focused heavily on the entertainment sector. In 2013, Wang spent $1.6 billion to buy British yacht maker Sunseeker, which has built vessels for James Bond films. Prior to that, Wang acquired U.S. movie chain AMC Cinemas for $2.6 billion in 2012.

Dalian Wanda is China's largest property owner with over 17 million square meters in its portfolio. The company operates shopping malls, luxury hotels and more.


China's booming economy of the last 30 years has seen the country suck in supplies of raw materials for manufacturing and, increasingly, manufactured and luxury goods from other countries.

Beijing will be hard pressed to meet its target of 7% GDP growth this year without doing the opposite of what is needed to put the economy on a sustainable footing, which is to curb debt-fuelled investment in infrastructure, construction and lame-duck heavy industries.

Also very difficult to gauge is the scale of the negative impact on the spending habits of investors whose wealth has been mullered and on the investing habits of companies whose share prices have been poleaxed.

But there is a serious risk of economic aftershocks from the market quake: multinationals with production in China aimed at Chinese consumers tell me they are significantly scaling back their manufacturing plans.

The big point about today's Chinese monetary stimulus is that it may revive growth and the stock market in the short term - but it will further inflate China's dangerous debt bubble and will increase the longer term risk of a crash.

After decades of rapid growth, China is running out of steam. Investors globally are worried that firms and countries that rely on high demand from China - the world's second-largest economy and the second-largest importer of both goods and commercial services - will be affected.

But although the slowdown in the Chinese economy will have a bearing on Chinese firms' profitability, many view the stock market as grossly inflated.

The main Shanghai index more than doubled in the 12 months up to mid-June.

Weak manufacturing figures from China prompted a massive fall in shares on Friday, which was followed by another, the biggest in eight years on Monday, triggering a mass sell-off across the globe.

The government, which has both money and the power to influence what are not free markets, has taken steps to lower the value of the yuan in order to boost demand for Chinese goods overseas.

Although very few Chinese people own shares - only about 2% of the population - they are extremely active on its stock market. They are responsible for the majority of daily turnover and the government is trying to ameliorate the impact of the trading rout on those individuals.

Many bought shares with borrowed money, and as those investments fall in value, they are now selling them to pay back their debts.

The interest rate cut should make their debt levels a little more bearable.

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