Chinese Rate Cut Brings Mixed Blessings For Standard Chartered PLC

Fears of a slowdown in China have been growing in recent months, and if it happens it could hurt prospects for the likes of Standard Chartered (LSE: STAN) and HSBC Holdings. Both earn substantial portions of their annual revenues in China and the region, but Standard Chartered has been suffering a bit of a crisis of confidence in its management on top of that.

Today’s news that China has announced a surprise cut in interest rates could prove to be something of a double-edged sword for Standard Chartered shareholders.

Surprise rate cut

Beijing has dropped its one-year benchmark lending rate by 40 points to 5.6%, after reassurances for months that it was on top of things and that its planned annual growth rate of 7.5% was going as planned. President Xi Jinping had previously pointed out that even if growth slowed to 7%, that would still be at the leading edge of world growth, telling us that Chinese risks were not so scary.

China’s property market had been overheating, and some sort of cooling had clearly been needed — but would it slow gently enough? The latest news suggests not, and hints that Chinese leaders are fearful of a large-scale property slump. And that’s the kind of thing that helped trigger the banking crash in the West!

How does the interest rate cut affect Standard Chartered?

Lower interest rates should stimulate growth, but it can take a long time for such things to feed through to the bottom line, and the Chinese economy is less finely tuned to free-market pressures than most in the West — who was it who pointed out the unbuckability of markets?

And the assumed fears for the longer-term economy must be sending some shivers down spines.

Anyway, the immediate effect seems to be a slight rise in the bank’s share price, and it’s up 38p (4%) to 947p on the day as I write. But that’s just a tiny blip compared to the 37% fall suffered over the past 12 months — and Standard Chartered stock is down 38% over the past five years.

Challenges still ahead

The interest rate cut should boost economic growth, and that’s surely the only thing behind the rise in the Standard Chartered price today, but it would be short sighted to look no further than that.

The bank has been having problems in its operations in South Korea, and it’s not possible to blame that solely on the economy of that country — and the board has been under increasing pressure from investors who are less than fully confident in the ability of chief executive Peter Sands to deal with downturns.

So while, in the short term, this might provide a bit of breathing space, it doesn’t let Standard Chartered off the hook in the longer term — and a Chinese slowdown could cause considerable harm.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.