China cuts interest rates, eases bank reserves rule

BEIJING: China’s central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months yesterday, ratcheting up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.

The moves came after Chinese stocks tumbled again yesterday, as investors despaired at the lack of policy action from Beijing in response to recent data suggesting the downturn in the world’s second-largest economy was deepening.

The People’s Bank of China (PBOC) said it was cutting the one-year benchmark bank lending rate by 25 basis points to 4.6%, cutting one-year benchmark deposit rates by the same amount, and reducing reserve requirements (RRR) by 50 basis points to 18% for most big banks.

Major Chinese stock indices nosedived more than 7% yesterday, hitting their lowest levels since December, following a more than 8% plunge on Monday.

The plunge had resumed last week despite Beijing’s efforts to arrest a 30% crash earlier in the summer with hundreds of billions of dollars of state-backed share purchases.

This time, the government appeared to be sitting on its hands until yesterday’s response, which aimed at shoring up economic fundamentals rather than underpinning stocks.

“Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its 7% growth rate fulfilled,” said Liu Li-Gang, China economist at ANZ Bank in Hong Kong.

Liu said the RRR cut was the most significant element of the PBOC action, as it would inject 650 billion yuan (RM430 billion), into the economy and ease concerns of a “hard landing”.

China, one of the main engines of the world economy, has overtaken Greece at the top of the worry list of global investors, who fret its economy is growing at a much slower pace than the official 7% target for 2015.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 7.1% yesterday, while the Shanghai Composite Index fell 7.6% to close below the psychologically significant 3,000-point level.

Though the PBOC move came after domestic markets had closed, stock markets in Europe jumped, and US stock futures were also given a lift. – Reuters