Daily Management Review

Fifth Interest Rate Cut in China Since November


In a bid to boost its slowing economy, the People's Bank of China has cut interest rates for the fifth time since November.

While announcing that the rate cuts will become effective on 26 August and are aimed at reducing corporate borrowing costs, the Chinese central bank reduced the benchmark lending and deposit rates by 0.25 percentage points.

Starting from 6 September, the reserve requirement ratio has also been reduced by the China's central bank by 0.5 percentage points, starting from 6 September while officially stating that the step was taken to boost enough liquidity and stable credit growth.

Some of the strain on the country's trade partners and commodity exporters is expected to be relieved by this measure.

Following the rate cut there was a fall in the Chinese market of 7.6% on Tuesday after a fall of 8.5% on Monday that virtually wrote off all the gains that the market had made for the preceding period of 2015.
“China’s decision to cut reserve requirements by 50bp (0.5 percentage points) will be regarded by many investors as overdue but nevertheless reassuring,” said analysts at JP Morgan  in a note.

“It was the failure of the authorities to act over the weekend that seemed to spook markets yesterday as it strengthened the impression that Chinese policymakers were starting to rely more heavily on the exchange rate as a way of stimulating demand as opposed to taking additional domestic policy measures,” the note said.

The latest rate cut by China is expected to result in gains for the dollar and commodities and decline for the euro and yen.

Applauding the move, Goldman Sachs welcomed the "much needed" moves to support the economy and market in China and consequently the global markets.
The move by the Chinese central bank comes after investors despaired and demand at the lack of policy action from the Chinese authorities after the huge fall on Monday. The Chinese market, along with several of the global markets have tumbled after release of several data that indicated that the second largest economy of the world was heading towards a recession.

Earlier, the Chinese government had tried to stop a slump in the Chinese market that has witnessed a 30 percent crash earlier in the summer through the purchase of hundreds of billions of dollars of state-backed shares. However in the recent spate of the market downturn in China, the government was accused to being idle in trying to curb the fall. Tuesday’s move is seen as a much anticipated one.

"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 percent growth rate fulfilled," said Liu Li-Gang, China economist at ANZ Bank in Hong Kong.

More than 650 billion yuan or 101 billion would be injected into the market after he RRR cut by the People’s Bank of China.

Overtaking Greece to be at the centre of global economic concerns, China, the second largest economy in the world and one of the major drivers of global economy, is perceived to be growing at a much slower pace than was anticipated through a major part of 2015.

(Sources: www.digitallook.com & www.reuters.com)