China's central bank cuts rates again

Its moves to stem stock market rout include lowering banks' reserve requirement ratio

BEIJING • China's central bank yesterday cut interest rates for the fifth time since last November and lowered the amount of cash banks must set aside, stepping up efforts to stem the biggest stock market rout since 1996 and a deepening economic slowdown.

The People's Bank of China (PBOC) announced on its website that it was reducing lending and deposit interest rates by 0.25 percentage point each and its reserve requirement ratio (RRR) by 0.50 percentage point. The moves take effect today and follow similar tandem cuts in late June.

China's "economic growth rate remains under pressure", the PBOC said in a statement, adding that the cuts were meant in part to "support the real economy to continue to develop healthily". The lending rate was cut to 4.60 per cent while the deposit rate was reduced to 1.75 per cent, the bank said. Reducing the RRR is also a stimulatory measure as it increases the amount of money banks can lend, so can boost economic activity.

The acceleration of monetary easing underscores policymakers' determination to meet Premier Li Keqiang's 2015 growth goal of about 7 per cent.

Chinese share prices collapsed in mid-June after a year-long debt-fuelled rally and while a massive government support programme provided a temporary boost, panic selling has set in again.

The risk of capital outflows and tighter liquidity after China devalued its currency on Aug 11, weaker- than-forecast economic readings, and a 22 per cent stock market plunge over four days added pressure for more stimulus.

"Clearly, this is targeted at the falling stock market," said Mr Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group in Hong Kong. "China needs extra liquidity to prevent systemic risks. But ultimately, fixing the economy is more important than fixing the stock market and advancing reforms is critical."

China's plunging stock markets and rising concerns overseas about its growth outlook have spurred a rout in equity markets worldwide.

Chinese share prices collapsed in mid-June after a year-long debt- fuelled rally and while a massive government support programme provided a temporary boost, panic selling has set in again.

China is a key driver of the global economy and even though expansions have been steadily slowing in recent years, concern has intensified that the situation is worse than the country's official data show.

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 Q&A-style statement released after the move.

Given volatility in global financial markets, "we need to use monetary policy tools more flexibly", the central bank said.

BLOOMBERG, AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on August 26, 2015, with the headline 'China's central bank cuts rates again'. Print Edition | Subscribe