China cuts interest rates a day after market plunge

Lower reserve limits for banks allow for more lending, bolster stock rally

HONG KONG — Acting a day after the Shanghai and Shenzhen stock markets plunged more than 7 percent, China’s central bank cut interest rates Saturday and reduced the reserves that certain banks must hold.

The two measures send a signal that the government may not be eager to see an abrupt end to a stock market rally that has seen prices more than double in the last 12 months. The rally has been underpinned by speculative trading heavily financed with borrowed money. Young, often poorly educated investors have been betting on further appreciation even as business managers, with more information on the true health of their companies, have reportedly been selling heavily.

“We think today’s move is mainly driven by the government desire to support a bull market,” Lan Shen and Shuang Ding, two economists at Standard Chartered, said in a statement Saturday evening.

Keeping the stock market buoyant, through measures like the interest rate cut, could help the Chinese government sell part of its stakes in governmentowned enterprises that have incurred huge debts.

Previous sharp drops in the stock markets this year have been quickly countered by optimistic statements in state-controlled media.

But Saturday’s moves, which included the fourth reduction in interest rates since November, were unusual in so closely following a stock market nosedive.

Yet both monetary policy moves on Saturday were carefully calibrated to limit their effect. China’s economy has already begun to stabilize in recent weeks, and the People’s Bank of China, the country’s central bank, has been concerned that it not feed another round of speculative lending and borrowing.

The People’s Bank cut interest rates by only a quarter of a percent, to 4.85 percent for one-year bank loans, and to 2 percent for one-year bank deposits. The central bank also told banks that specialize in agricultural loans and loans to smaller businesses they could hold slightly smaller reserves against their deposits, freeing them to lend more.

But the central bank pointedly did not reduce the reserve requirement ratio for large banks, which represent more than half of the country’s financial system.

The lower ratio and the reduced interest rates were to take effect Sunday.

Economic measures like monthly surveys of corporate purchasing managers show that the Chinese economy remains fairly weak but is no longer deteriorating. A slide in housing prices that began in the spring of last year appears to have leveled off and even reversed in some cities.

“The recent data that we had was definitely not good,” said Louis Kuijs, the chief economist for greater China at the Royal Bank of Scotland.

“But it wasn’t a disaster.”