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MarketWatch First Take

China's 'good news' rate cut spooks market

LOS ANGELES (MarketWatch) -- Sometimes, good news is bad news.

For months now, the markets have eagerly awaited a major easing move from the People's Bank of China. At even the slightest hint of a coming rate cut or even just another trimming of banks' reserve ratios, stocks have rallied, believing that monetary-policy support would keep the world's second-largest economy safe for a "hard landing."

Then, at long last, Beijing delivered with a quarter-point decrease to the policy rates, while adding some interest-rate liberalization measures for an extra kick.

Over in the U.S., the move sent Wall Street higher in Thursday morning trade, with shares making gains that held until later in the session, when Fed chief Ben Bernanke failed to promise more U.S. easing for the near future.

But Chinese markets didn't take the "good news" well -- after a fleeting initial boost, Hong Kong's Hang Seng Index (HSI) and the Shanghai Composite (000001) headed south.

What gives?

The answer appears to lie, at least in part, with the timing of the decision.

The PBOC, unlike the central banks in most other major economies, doesn't set dates for its policy announcements, preferring to act whenever they deem it prudent, rather than tying themselves to a policy-meeting calendar.

Nonetheless, many market players had expected any interest-rate action to wait until this weekend, when China's statistics bureau is due to release its monthly flood of data, including key inflation, industrial output and retail-sales metrics.

Presumably, PBOC Gov. Zhou Xiaochuan and his colleagues have an idea of what sort of picture these numbers will paint.

Combine that with the PBOC's recent custom of waiting until weekends or holidays to make their policy announcements, and Thursday's rate cut becomes a "surprise" move that suggests some level of emergency.

-- Michael Kitchen, Asia Editor