China cuts lending rates to record low after stocks slump

Fourth reduction since Nov; banks' reserve requirement ratio for certain sectors lowered

Beijing - China's central bank cut lending rates to a record low and trimmed the amount of cash that some banks must hold as reserves yesterday, as it stepped up efforts to support an economy that is headed for its poorest performance in a quarter of a century.

The People's Bank of China (PBOC) said on its website yesterday that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.85 per cent, and reducing the one-year benchmark deposit rate by 25 basis points to 2 per cent.

The cut is the fourth since November.

The bank lowered the reserve requirement ratio for banks lending to the farm sector and small and medium-sized enterprises by 50 basis points.

The interest rate and reserve requirement ratio cuts will "help stabilise growth, adjust structures and lower social financing costs", the central bank said.

PBOC governor Zhou Xiaochuan's latest move adds to a global wave of monetary easing.

South Korea and New Zealand are among the latest to lower their key rates as China's weakness combined with domestic dynamics argue for further stimulus.

The easing follows the biggest drop in the stock market in five months.

While industrial production and retail sales picked up last month, investment slowed further - a sign of weakness in infrastructure spending that policymakers are keen to reverse.

"The central bank doesn't want a panic caused by the stock rout to spread," said Mr Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong.

China last cut interest rates on May 10, lowering one-year benchmark lending rates by 25 basis points to 5.1 per cent, and lowering one-year benchmark deposit rates by 25 basis points, to 2.25 per cent.

The central bank last cut the reserve requirement ratio for all commercial banks by 100 basis points on April 19 - the deepest single reduction since the depth of the global financial crisis in 2008 - following a 50-basis-point cut in February.

Such system-wide reserve requirement ratio cuts result in large amounts of liquidity flowing back into monetary supply. Targeted cuts, like that announced yesterday, are not likely to have the same effect.

The central bank has frequently made targeted cuts to spur lending into certain sectors, but they rarely have a significant wider macroeconomic effect as banks are often reluctant to lend to these sectors amid concerns over collateral and risk.

Weighed down by a property downturn, factory overcapacity and local debt, growth in China's economy is expected to slow to a quarter-century low of around 7 per cent this year. That is down from 7.4 per cent last year, even with expected additional stimulus measures.

Despite the drumroll of rate cuts, the real cost of borrowing in China remains stubbornly high, due in part to cooling inflation and banks' reluctance to pass lower rates on to customers.

That has further squeezed manufacturers struggling with tepid demand.

Reuters, Bloomberg

A version of this article appeared in the print edition of The Sunday Times on June 28, 2015, with the headline 'China cuts lending rates to record low after stocks slump'. Print Edition | Subscribe