BEIJING • Central bank governor Zhou Xiaochuan is probably not finished yet.
Even after cutting interest rates for the fifth time since last November and telling banks they can hoard less cash, the People's Bank of China (PBOC) governor remains under pressure to do more to support the world's No. 2 economy amid the biggest slide in stocks since 1996.
"A circuit breaker is needed to dispel excessive pessimism and restore confidence," said Mr Frederic Neumann, co-head of Asian economics research at HSBC Holdings in Hong Kong. "Further support measures in the coming weeks and months will be needed."
Equities around the world initially rallied on Tuesday after the PBOC said it will cut the one-year lending rate by 25 basis points to 4.6 per cent and lowered the required reserve ratio by 50 basis points for all banks. In the United States, a gain of as much as 2.9 per cent in the Standard & Poor's 500 Index was erased in late trading.
Mr Zhou swung into action two weeks since a devaluation of the yuan and a deceleration in China's economy ignited fears about the outlook for global growth.
The Shanghai Composite Index fell 1.3 per cent, closing at 2,927.29 yesterday. The yuan declined and interest-rate swaps fell the most since June.
"This is a positive development that will help curb investor anxiety about a pronounced slowdown in China's growth," said Mr Tim Condon, head of Asian research at ING Groep NV in Singapore. "It should curb contagion to global markets."
Mr Shane Oliver, head of investment strategy at fund manager AMP Capital Investors in Sydney, is among those predicting further reductions in rates and the reserve ratio. He anticipates China will cut its benchmark lending rate to 4 per cent by the year end, using an arsenal unavailable to counterparts such as the Federal Reserve which already run key rates near zero.
"China's monetary policy is way too tight," Mr Oliver said. "Further easing in both interest rates and the reserve ratio will be needed."
The fresh easing reinforces efforts by policymakers to deliver on Premier Li Keqiang's growth goal of about 7 per cent for this year. The goal is being jeopardised by deflation risks, overcapacity and a debt overhang, which leave the economy poised for its slowest expansion since 1990.
Industrial production, investment and retail data all trailed analysts' estimates last month.
The easier conditions for banks may have been necessitated by a need to offset a drying-up of liquidity in markets, following the surprise decision on Aug 11 to devalue the yuan.
The PBOC subsequently bought its currency to stabilise the exchange rate and curb capital outflows. China Merchants Securities estimated that the policy action is the equivalent of releasing 700 billion yuan (S$153 billion) into the financial system.
The economy still faces downward pressure, and the task of stabilising growth, adjusting its structure, pushing reforms and improving living standards is very challenging, the PBOC said in a statement released after the move. Given the volatility in global financial markets, it needs to "use monetary policy tools more flexibly", it said.
China has halted intervention in the stock market so far this week as policymakers debate the merits of an unprecedented government campaign to support share prices, according to people familiar with the situation.
BLOOMBERG
