Asian stocks edge higher as Chinese central bank makes a small rate cut

Asian stocks were cautiously higher on Friday, as the Chinese central bank cut a key lending rate in a bid to lower companies’ borrowing costs.

Hong Kong’s Hang Seng Index inched up 0.1%. China’s Shanghai Composite Index added 0.2%.

Japan’s Nikkei gained 0.3%. South Korea’s Kospi also traded 0.3% higher.

Earlier in the day, the People’s Bank of China set the one-year Loan Prime Rate at 4.2%, down from the previous rate of 4.25% in August. It was the second such rate cut cut in two months, as China tries to prop up its flagging economy.

The central bank revamped the LPR last month in a long-awaited reform to the way it manages money to support growth. Its aim is to make it cheaper and easier for companies to borrow. The LPR, which will become the new benchmark for banks to price loans, is supposed to better reflect changes in market rates.

China’s economy is in the middle of a slowdown, and the authorities are stepping up policy support to stimulate growth. Earlier this month, the central bank slashed the amount of cash banks have to keep in reserve to boost lending.

Friday’s cut in the LPR is “a baby-step,” as the central bank is cautious about the new interest rate, said Ken Cheung, chief Asian foreign exchange strategist for Mizuho Bank in Hong Kong.

“Since the new LPR is relatively untested, the PBOC appears to be taking a measured approach at first,” Julian Evans-Pritchard, senior China economist for Capital Economics, said in a report on Friday.

Still, Evans-Pritchard expects the central bank to make more aggressive rate cuts ahead.

“With economic activity likely to come under further pressure in the coming quarters and monetary easing so far failing to generate much of a pick-up in credit growth, we think the PBOC will need to start engineering larger declines in the LPR before long,” he said.

The Chinese central bank’s move came one day after the Federal Reserve reduced interest rates by a quarter percentage point, making their second cut in a row.

Markets reacted to the news with caution. US stocks closed mixed on Thursday.

“Global easing bias is still prevailing, but the scale of easing measures may be somewhat disappointing,” said Cheung from Mizuho Bank.

“Indeed, the dramatic de-escalating China-US trade talks should warrant a more conservative monetary easing,” he said, adding that market attention is likely to shift to the outcome of the trade negotiations.

Deputy-level officials from the United States and China met in Washington on Thursday to prepare for trade talks among senior executives in the coming weeks.

The two countries said earlier this month that they have agreed to return to the negotiating table in Washington after months of trade tensions.

In the interim, the countries have been taking steps to de-escalate tensions between them. China last Friday said it would exempt American soybeans and pork from its latest round of tariffs, and on Monday, the US Department of Agriculture said that US companies have begun to export soybeans to China.

Earlier this month, China said it would waive other tariffs on US goods, and President Donald Trump followed with plans of his own to push back new tariffs on Chinese goods by two weeks.