Global Equity Market Sensitivity to China's Monetary Policy Shifts: Implications for the FTSE 100

The global equity market's sensitivity to monetary policy shifts has never been more pronounced than in the era of China's evolving economic strategy. As the world's second-largest economy navigates deflationary pressures and structural challenges, its monetary policy decisions—particularly interest rate adjustments—have become pivotal in shaping international market dynamics. For the FTSE 100, a barometer of UK-based multinational corporations, the interplay between China's rate decisions, investor sentiment, and macroeconomic linkages offers both risks and opportunities.

China's Monetary Policy: A Delicate Balancing Act

In late 2024, China's leadership signaled a shift toward a “moderately loose” monetary policy, with the People's Bank of China (PBOC) implementing a series of rate cuts and reserve requirement reductions to stimulate aggregate demandChina’s Rate Cuts Spark Concerns Over Banking Stability and Global Impact^[1]. These measures, including a 10-basis-point cut to the seven-day reverse repo rate and a 50-basis-point RRR reduction in May 2025, aim to counteract weak domestic consumption and a property market slumpResearch on the Impact of Economic Policy^[3]. However, such easing has raised concerns about the sustainability of China's banking system, as net interest margins for commercial banks erode under prolonged low-rate environmentsChina’s Rate Cuts Spark Concerns Over Banking Stability and Global Impact^[1].

The PBOC's recent foray into unconventional tools—such as allowing banks to lend for share buy-backs and shareholder purchases—further underscores its dual mandate of stabilizing financial markets while avoiding the pitfalls of past overstimulationChina’s Rate Cuts Spark Concerns Over Banking Stability and Global Impact^[1]. These interventions, while targeted at bolstering blue-chip equities, risk creating moral hazard and distorting market signals.

Transmission Mechanisms: Trade, Capital Flows, and Sentiment

China's monetary policy exerts influence on the FTSE 100 primarily through trade and capital flow channels. Academic research highlights that the transmission of Chinese monetary policy is dominated by the trade channel, with the exchange rate and financial channels playing secondary rolesInternational transmission of China’s monetary policy^[2]. For instance, rate cuts in China reduce borrowing costs, potentially stabilizing supply chains and mitigating disruptions from U.S.-China trade tensions—a factor that indirectly supports global equity markets, including the FTSE 100What to expect from Chinese monetary policy in 2025^[4].

Capital flows, however, present a more direct link. As China's central bank eases policy, liquidity injections can spur cross-border capital movements, particularly if global interest rates trend downward. This dynamic was evident in late 2024, when initial rate cuts triggered a surge in Chinese equities but also prompted investors to reallocate funds toward Western markets, including high-dividend FTSE 100 constituentsWhat to expect from Chinese monetary policy in 2025^[4]. Conversely, policy uncertainty—such as concerns over uneven execution of stimulus measures—can amplify volatility, as seen in the FTSE 100's mixed reactions to China's 2024–2025 easing cycleChina’s Rate Cuts Spark Concerns Over Banking Stability and Global Impact^[1].

Investor sentiment further modulates these effects. Studies show that economic policy uncertainty (EPU) in China negatively impacts investor sentiment, particularly in bull markets, where sensitivity to policy shifts is heightenedResearch on the Impact of Economic Policy^[3]. While sentiment can mitigate “bad volatility” in some contexts, its influence is limited when monetary policy tools like RRR adjustments are deployedMonetary Policy, Investor Sentiment, and the Asymmetric Jump^[5]. This duality explains why the FTSE 100's response to China's rate decisions often reflects a tug-of-war between optimism over global liquidity and caution over structural risks in the Chinese economy.

FTSE 100 Volatility: A Case of Spillover and Positioning

The FTSE 100's volatility in 2024–2025 has been closely tied to China's policy trajectory. A 10-day historical volatility index for the FTSE 100 peaked at 6.69 in early 2025, coinciding with PBOC rate cuts and renewed U.S. tariff threatsFTSE 100 Index Volatility History & Chart Since 1984^[6]. Event studies suggest that negative shocks from China—such as weaker-than-expected retail sales or property sector defaults—amplify volatility spillovers through Hong Kong as an intermediary, a pattern observed during U.S. Federal Reserve announcementsStock market volatility spillovers from U.S. to China: The pivotal^[7].

Investor positioning has also shifted in response to China's policy signals. As the PBOC signaled prolonged easing, FTSE 100 traders exhibited a preference for risk-on assets, with implied volatility indices (IVI) reflecting reduced hedging activityFTSE Implied Volatility Index Series (IVI) | LSEG^[8]. However, this optimism remains fragile, as China's history of uneven policy execution—such as the 2015 stock market crash—continues to weigh on long-term confidenceChina’s Rate Cuts Spark Concerns Over Banking Stability and Global Impact^[1].

Conclusion: Navigating the New Normal

China's monetary policy will remain a critical driver of global equity volatility, particularly for indices like the FTSE 100 that are exposed to trade and capital flow linkages. While rate cuts can temporarily stabilize markets, their long-term efficacy depends on resolving structural challenges in China's economy. For investors, the key lies in balancing exposure to liquidity-driven opportunities with hedging against policy uncertainty. As the PBOC's next moves unfold, the FTSE 100's trajectory will serve as a litmus test for the resilience of global markets in an era of interconnected monetary experimentation.