A 25-50 basis point interest rate cut is expected in the U.S. this week, marking the first reduction since 2020.
As expectations rise for the US Federal Reserve to cut interest rates this week, experts suggest that Chinese stocks may see a short-term liquidity boost, though a long-term, sustainable recovery will still depend on improving company fundamentals.
While central banks like the Bank of England and Bank of Japan are also set to announce their monetary policies this week, all attention is on the Fed, which is likely to lower rates for the first time since March 2020.
Yi Huan, chief macroeconomist at Huatai Securities, noted in a report on Monday that while the Fed is expected to initiate a rate-cutting cycle early Thursday (Beijing time), the size of the reduction is still uncertain. Potential options include a 50-basis-point cut or a 25bp cut accompanied by dovish forward guidance, with the former being more likely. Yi added that the Fed may reduce rates by over 100bp by the year's end.
According to CME Group’s FedWatch tool, there is a 63 percent chance the Fed will opt for a 50bp cut, up from 30 percent a week ago. Michael Feroli, JPMorgan’s chief US economist, also supported a 50bp cut, calling it the "right" move. However, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, argued that a 25bp cut would be a more measured start, given the cooling inflation and strong US corporate earnings in the last quarter.
US GDP grew by 3 percent in the second quarter, and the Atlanta Fed’s GDPNow forecast suggests that third-quarter growth will exceed 2 percent. Although the labor market is cooling, it remains stable, which Ozkardeskaya believes would justify a more modest 25bp cut.
For the Chinese market, how domestic policies respond to a loosening global environment will be critical, experts at China International Capital Corp Ltd (CICC) observed. The Fed’s rate cut could create more room for China's central bank to ease its policies, though strong stimulus measures are unlikely.
Wu Xinkun, chief strategist at Haitong Securities, stated that a Fed rate cut would likely alleviate pressure on the RMB exchange rate, opening up room for China’s monetary policy and boosting A-share liquidity in the short term. He added that foreign capital could flow back into the A-share market, improving liquidity, especially for public financial services and food and beverage companies.
However, Wu stressed that the medium- to long-term performance of A-shares will depend on company fundamentals. If China’s economic recovery continues with supportive policies, the A-share market could see more sustained upward momentum, benefiting sectors such as Chinese technology and manufacturing.
Meanwhile, CICC analysts highlighted that the Hong Kong stock market, being more sensitive to external liquidity changes, could react more dynamically to a Fed rate cut. As the Hong Kong dollar is pegged to the US dollar, interest rate-sensitive sectors like biotech, tech hardware, and export companies reliant on US dollar financing could benefit from the Fed's move.
On Tuesday, the Hang Seng Index in Hong Kong closed 1.32 percent higher, while the A-share market remained closed for the Mid-Autumn Festival.