China cuts rates, reserve ratio to aid economy

Reuters

Email Print

A currency dealer works in front of electronic boards showing the Korea Composite Stock Price Index (KOSPI) (R), and the exchange rates between the Chinese yuan and South Korean won (L), at a dealing room of a bank in Seoul, South Korea, August 25, 2015. Photo: Reuters/Kim Hong-Ji A currency dealer works in front of electronic boards showing the Korea Composite Stock Price Index (KOSPI) (R), and the exchange rates between the Chinese yuan and South Korean won (L), at a dealing room of a bank in Seoul, South Korea, August 25, 2015. Photo: Reuters/Kim Hong-Ji

RELATED NEWS

China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stumbling economy and a plunging stock market that has sent shockwaves around the globe.
Global shares, bond yields and oil prices all rallied on the news as investors looked to the policy easing to stabilize for now China's battered stock market, which has nosedived more than 15 percent this week.
The cuts followed a shock devaluation in the yuan two weeks ago, a move authorities billed as aiding financial reforms, but which some saw as the start of a gradual slide in the currency to help Chinese exporters.
"Frankly, this shows a bit of panic in my mind," Andrew Polk, resident economist at the Conference Board in Beijing, said of Tuesday's simultaneous cuts in interest rates and the reserve requirement ratio (RRR) - the second since June.
"This is a big-bang move," he said. "It's meant to address some real issues and also prevailing market sentiment over the past two days."
The People's Bank of China (PBOC) said it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6 percent. The rate cut, the fifth since November, will be effective from Aug. 26, it said in an online statement.
One-year benchmark deposit rates were also reduced by 25 basis points, and the ceiling for deposit rates with tenors of over a year was scrapped to further free up China's interest rate market.
At the same time, the PBOC said it was lowering the RRR by 50 basis points to 18.0 percent for most big banks, effective Sept. 6. The RRR for select smaller financial institutions was also further reduced by an additional 50-300 basis points.
"Currently, there is still downward pressure on China's economic growth," the central bank said in a separate statement. "There is also relatively big volatility in global financial markets, which require more flexible usage of monetary policy tools."
Some analysts welcomed the moves as overdue support for the world's second-largest economy, but warned it may not be enough to shield China from a slowdown that many suspect is much sharper than official figures suggest.
"Further monetary policy easing by the PBOC is still on the cards," economists at ANZ Bank said in a note.
"The producer price index has remained in negative territory for 41 consecutive months, indicating that China's deflationary pressure remains strong."
Changing tack
China's currency devaluation, and a near-collapse in its stock market in early summer have sparked fears that the Chinese economy could suffer a hard landing that will hammer world growth and send global markets into a tailspin.
Worse, this week's plunge in Chinese shares, which unlike the earlier summer crash was not countered with massive state buying, fed confusion over government policy, and fuelled concerns that authorities were not on top of China's economic woes.
Mark Williams from Capital Economics in London argued that the latest rate and RRR cuts suggested that China was changing tack.
"They have realized the futility of trying to prop up prices through direct purchases and it makes sense to concentrate on the macro repercussions," Williams said.
"It may help shore up equity prices, but I don't think we're going to get a big rebound."
To keep China's economy growing at around 7 percent, as targeted by the government, economists widely expect China's central bank to lower the RRR by at least another 50 basis points this year.
Though China has rolled out a slew of policy measures in the past year to try to put a floor beneath its economy, official data suggest activity has sagged further in recent months.
A private survey showed activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled, adding to worries that the economy may be slowing sharply.
And to further complicate China's monetary policy, the steady fall in interest rates could hasten capital outflows and further drag on the yuan, at a time when authorities have publicly vowed to prevent the currency from sharp falls.
Premier Li Keqiang was quoted by state television as saying late on Tuesday that there was no basis for continued depreciation in the yuan.
"The question remains that whether China wants to see more currency depreciation," said Zhou Hao, an economist at CommerzBank.
Goldman Sachs estimated that China has spent around 900 billion yuan ($140 billion) trying to prop up its stock market, while official foreign exchange reserves data suggest that authorities may have spent $340 billion in the past year to keep the yuan from sliding.
 
 

More World News