(Nov 24): China’s benchmark stock index rose to a three-year high after the central bank’s surprise interest rate cut late last week. Recent history suggests the gains won’t last long.

While the Shanghai Composite Index climbed 2 percent today, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months. The last time the PBOC lowered lending and deposit rates, in July 2012, the benchmark index fell 7.4 percent, according to data compiled by Bloomberg.

The rate cut, announced after the close of regular trading in China on Nov. 21, underlines concern that a slowdown in the world’s second-largest economy is deepening. Factory production rose 7.7 percent in October from a year earlier, the second- weakest pace since 2009, while retail sales missed economists’ forecasts. China’s economy expanded 7.3 percent in the three months ended September and it’s projected to grow this year at the slowest pace since 1990 amid weakness in the property market and manufacturing.

“In the short term, it’s positive, but in the long term, the economic slowdown is probably the main driver of the market,” Lucy Qiu, an emerging markets analyst at UBS Wealth Management, which has $1 trillion in invested assets, said by phone from New York on Nov. 21. “This announcement came after a slew of underperforming economic releases. It kind of shows the government is determined to support growth, but going forward we really have to look at the data.”

Easing Cycle

The PBOC has cut reserve requirements for the nation’s largest lenders three times and lowered benchmark rates three times since late 2011.

Policy makers said in a Nov. 21 statement that the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said.

China’s retail inflation held at the slowest pace since January 2010 last month. Consumer prices increased 1.6 percent, matching September’s rate, while producer prices fell for a record 32nd month, slumping 2.2 percent.

Sustained Gains

The Shanghai index climbed 49 points to 2,535.51 at the 11:30 a.m. break, heading for the highest level since September 2011.

Gains in stocks will be sustained amid a more benign global environment than in 2012, when Europe’s sovereign debt crisis and a debate over U.S. fiscal policy threatened growth, according to Brian Jacobsen, who helps oversee $242 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.

“When they did the rate cut in 2012, the global outlook was much in question,” Jacobsen said by phone. “We are in a favorable environment as opposed to a hostile global growth environment.”

Two years ago, expansion in the Group of 10 economies slowed to 1.2 percent amid dual threats from weak euro-region economies and disagreements over tax cuts and the federal budget in the U.S. The G-10 economies will probably grow 1.7 percent this year and 2.2 percent in 2015, the fastest pace since 2010, according to analyst estimates compiled by Bloomberg.

Overseas Rally

Stocks rallied around the world on Nov. 21 after the PBOC lowered its one-year deposit rate by 0.25 percentage point to 2.75 percent and cut the one-year lending rate 0.4 percentage point to 5.6 percent. The decision came on the same day that European Central Bank President Mario Draghi said the regional monetary authority may broaden asset purchases, and three weeks after the Bank of Japan expanded its stimulus program.

While China’s rate cut fueled gains in overseas-traded shares, it shows that authorities are concerned about the economy’s slowdown, according to Alan Gayle, who helps oversee about $50 billion as a senior strategist at RidgeWorth Capital Management.

President Xi Jinping is trying to manage a transition to lower rates of expansion as he shifts the economy toward domestic consumption from a dependence on exports and infrastructure spending.

Lower rates are “good for stocks there, that’s the reason they’re up,” Gayle said by phone from Atlanta. “It also means the central bank is getting a little nervous about deceleration in growth and the ability to transform to a more consumer-led economy