Will Lower Interest Rates and Access to Shares Drive Chinese ETF Prices Higher? [Alibaba Group Holding Ltd(NYSE:BABA), (NYSEARCA:ASHR), (NYSEARCA:FXI)]

china golden dragonEasier interest rates and fresh access for foreigners should help drive the Chinese equity bourses higher. The Chinese stock markets have been consolidating since 2012, which was the last time the central bank reduced interest rates. The Chinese central bank has sent a clear signal to investors about the future of monetary policy, which will likely lead to higher prices for Chinese stocks.

Following the Bank of Japan’s increase to its asset purchase program, the People’s Bank of China (PBOC) slashed short-term lending and deposit rates confirming slower growth in the region.

The PBOC unexpectedly cut interest rates, reducing the one-year lending rate by 40 basis points and the one-year deposit rate by 25 basis points. The change in interest rates reflects Chinese policymakers’ determination to keep growth above 7%. With GDP dropping to 7.3% in the third quarter from 7.5% in the second quarter, the situation is more urgent.

The Shanghai composite started to accelerate higher along with GDP as rates hit historic lows in China in 2005. The PBOC was prudent about increasing short-term interest rates in 2007, which eventually led to a sell-off just as the global financial crisis hit in 2008. Although the PBOC cut rates during this period, they began to increase them again in 2010 and were forced to make a modest cut in 2012. Since July 2012, Chinese lending rates remained unchanged until last week and the Shanghai market has also remained range bound.

The cut in interest rates sends a clear signal to the market on policy intention. The PBOC is likely to use a range of tools including

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