China fell back on its major levers to stem the biggest stock market rout since 1996 and a deepening slowdown, cutting interest rates for the fifth time since November and lowering the amount of cash banks must set aside.
The one-year lending rate will drop by 25 basis points to 4.6 percent effective Wednesday, the Beijing-based People’s Bank of China said on its website Tuesday, while the one-year deposit rate will fall a quarter of a percentage point to 1.75 percent. The required reserve ratio will be lowered by 50 basis points for all banks to cover funding gaps, it said.
“With the government’s efforts to prop up equity prices through direct purchases in tatters, policymakers have changed tack,” said Mark Williams, chief Asia economist at Capital Economics Ltd. in London. “The move may halt the market slide but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”
Before Tuesday’s move, central bank Governor Zhou Xiaochuan had already this year lowered the required reserve ratio twice, with an additional move targeted to certain banks. Officials are also acting to boost lending including at the country’s policy banks.
“The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy,” said Lu Ting, chief economist at Huatai Securities Co. “Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.”
In another step to liberalize interest rates, China will now let banks set rates freely on deposits with terms longer than a year. For short-term deposits less than a year, banks are limited to offering as much as 150 percent of the benchmark rate.
European and U.S. shares clawed back some losses following their biggest declines since the 2008 financial crisis. The Standard & Poor’s 500 index rose 2.2 percent to 1934.38 at 10:06 New York time after entering a correction Monday. Russia’s ruble led a rebound in developing-nation currencies as raw-material prices advanced from the lowest level since 1999. Chinese stock-index futures surged.
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