The Impact of the Fed's September 2025 Rate Cut on A-Shares and Hong Kong Markets: Assessing the Dawn of a New Bull Market

The Federal Reserve's 25-basis-point rate cut in September 2025, widely anticipated and priced into markets, has ignited renewed optimism in A-Shares and Hong Kong markets. This decision, driven by a cooling labor market and moderating inflation, marks the beginning of a potential easing cycle and raises the question: Is a new bull market imminent?

The Fed's Move and Immediate Market Reactions

The Fed's decision to lower the federal funds rate from 4.25%–4.50% to 4.00%–4.25% was largely telegraphed, with CME FedWatch data indicating a 96% probability of the cutWill the Fed cut rates this week? These charts may determine its decision^[1]. The rationale centered on slowing hiring—unemployment rose to 4.3% in August 2025—and inflation easing to 2.9% year-over-year, albeit still above the Fed's 2% targetWill the Fed cut rates this week? These charts may determine its decision^[1]. Markets had already priced in the cut, with the 2-year Treasury yield dropping to its lowest level since April 2025How Stocks Historically Performed During Fed Rate Cut Cycles^[3].

Hong Kong and Chinese markets responded with mixed signals. The Hang Seng Index surged 2% in the days leading up to the decision, while the Shanghai Composite reached a 10-year high in late AugustWhat’s the Impact of the Fed Interest Rate Cut on the Chinese Investment Market^[2]. However, post-announcement volatility emerged, with major indices closing lower as concerns about economic weakness persistedHow Stocks Historically Performed During Fed Rate Cut Cycles^[3]. This duality reflects the tension between accommodative monetary policy and underlying structural challenges, such as China's property sector woes and global trade tensionsThe Expected September 2025 Fed Rate Cut: Analysis of Market Reactions^[4].

Historical Precedents and Structural Linkages

Historically, Fed rate cuts have acted as a catalyst for emerging markets. For instance, the 50-basis-point cut in September 2024 spurred a 14.9% rally in the CSI 300 index, as China's central bank followed suit with rate reductions and reserve requirement cutsWhat’s the Impact of the Fed Interest Rate Cut on the Chinese Investment Market^[2]. The Hong Kong dollar's peg to the U.S. dollar further amplifies these effects: the Hong Kong Monetary Authority (HKMA) typically aligns its base rate with the Fed's, ensuring synchronized liquidity conditionsWill the Fed cut rates this week? These charts may determine its decision^[1].

This interdependence was evident in 2024, when Hong Kong's base rate dropped to 5.25% after the Fed's rate cut, boosting liquidity for local businesses and consumersWill the Fed cut rates this week? These charts may determine its decision^[1]. A similar dynamic is unfolding in 2025, with Chinese banks already signaling potential rate reductions to complement the Fed's easingThe Expected September 2025 Fed Rate Cut: Analysis of Market Reactions^[4]. However, the depreciation of the U.S. dollar relative to the yuan poses a risk for Chinese exporters, who face margin pressures amid Trump administration tariffsThe Expected September 2025 Fed Rate Cut: Analysis of Market Reactions^[4].

Post-Cut Performance and Investor Sentiment

In the immediate aftermath of the September 2025 rate cut, A-Shares and Hong Kong markets exhibited divergent trends. The Hang Seng Index approached a four-year high, driven by improved investor sentiment and a shift from fixed-income products to equitiesWhat’s the Impact of the Fed Interest Rate Cut on the Chinese Investment Market^[2]. Meanwhile, the Shanghai Composite's 10-year high underscored domestic optimism, though valuation metrics like P/E ratios remain elevated compared to historical averagesWhat’s the Impact of the Fed Interest Rate Cut on the Chinese Investment Market^[2].

Investor behavior also shifted. Sectors sensitive to liquidity, such as technology, consumer discretionary, and biotech, outperformed, while traditional lenders faced pressure from narrower net interest marginsHow Stocks Historically Performed During Fed Rate Cut Cycles^[3]. BlackRock analysts advised portfolios to tilt toward equities and away from long-term bonds, anticipating a prolonged low-yield environmentFed Rate Cuts & Potential Portfolio Implications | BlackRock^[5].

Bull Market Potential: A Delicate Balance

The question of a new bull market hinges on two factors: the sustainability of the Fed's easing cycle and China's ability to offset external headwinds. Historically, rate cuts during economic expansions (e.g., 1998) have delivered robust returns, with the S&P 500 gaining 22.27% in the following yearHow Stocks Historically Performed During Fed Rate Cut Cycles^[3]. However, cuts during recessions (e.g., 2001, 2007) have been accompanied by market declinesHow Stocks Historically Performed During Fed Rate Cut Cycles^[3].

For A-Shares and Hong Kong markets, the September 2025 cut provides a tailwind but is not a guarantee of a bull market. Key risks include:
1. Inflation Rebound: Persistent inflation, even at 2.9%, could force the Fed to pause further cutsWill the Fed cut rates this week? These charts may determine its decision^[1].
2. Tariff Pass-Through: Trump-era tariffs continue to elevate input costs for Chinese manufacturersThe Expected September 2025 Fed Rate Cut: Analysis of Market Reactions^[4].
3. Policy Uncertainty: Political pressures on the Fed, as highlighted by President Trump's public advocacy for deeper cuts, could disrupt market expectationsWill the Fed cut rates this week? These charts may determine its decision^[1].

Conversely, the easing cycle could support a bull market if China's stimulus measures—such as additional rate cuts and infrastructure spending—offset global headwinds. The Central Bank of China's past responsiveness to Fed easing suggests a coordinated approach to bolster domestic demandWhat’s the Impact of the Fed Interest Rate Cut on the Chinese Investment Market^[2].

Conclusion

The Fed's September 2025 rate cut has injected liquidity into global markets and reignited hopes for a bull market in A-Shares and Hong Kong. While historical precedents and current investor behavior point to positive momentum, the path forward remains contingent on the Fed's ability to balance inflation control with growth support and China's capacity to navigate trade tensions. For now, the stage is set for a cautious bull case, but investors must remain vigilant to evolving macroeconomic signals.