China slashes rates: China Cuts Interest Rates

Published: August 26, 2015

China slashes rates: China Cuts Interest Rates, China’s central bank on Tuesday cut its benchmark interest rate and freed banks to lend more, the latest signs of the government’s growing distress over slumping stocks and slowing economic growth.

The central bank’s action followed a global stock market rout in which China led the declines. The main Shanghai share index plunged an additional 7.6 percent on Tuesday, to its lowest level this year, signaling that two months’ worth of attempts by the government to prop up stock prices had limited effect. In early trading on Wednesday, the index swung between gains and losses, diminishing investors’ hopes for a strong rebound after the rate cut.

On Tuesday, China’s prime minister, Li Keqiang, acknowledged that the country was feeling the effects of market turbulence, but insisted that the economy remained sound.

“Currently, global economic trends are opaque and confusing, and market volatility is quite large, and this has had some impact on the Chinese economy,” Mr. Li said, according to a report on Chinese television news. “But fundamentally the overall stability of the Chinese economy has not changed, and positive factors sustaining a turn for the better in the real economy are accumulating.”

China, he added, would be able to fulfill its economic goals for the year. Mr. Li also noted that there would be no continued depreciation of China’s currency, the renminbi, after a sharp devaluation earlier this month. The currency “can maintain fundamental stability at a reasonable and balanced level,” he said.

Even so, the tumult has prompted further action by the leadership.

In an aggressive two-part move on Tuesday, the central bank lowered the benchmark lending and deposit rates by 0.25 of a percentage point. It also cut the so-called reserve requirement ratio – the amount of cash that banks are required to hold in reserve – by 0.5 of a percentage point.

It was China’s fifth interest rate cut since November, and the fourth reduction of the reserve ratio since February. The central bank made a similar tandem cut to both rates in June, when the stock market first began to fall from its peak, but that reduction of the reserve ratio did not apply to the biggest banks.

Cutting interest rates may help lift the economy, as signs have proliferated in recent weeks that growth is slowing faster than official data suggests. A survey released on Friday showed that output in China’s manufacturing industry contracted in the first three weeks of August at the fastest pace since the depths of the financial crisis.

“Currently, there are persisting downward pressures on the country’s economic growth,” the central bank, the People’s Bank of China, said in an explanation that accompanied the announcement Tuesday evening. “There has also been quite large volatility in global capital markets recently, and monetary policy tools need to be applied more flexibly.”

The central bank also made a step toward interest rate liberalization by removing the upper limit on interest rates for fixed-term deposits of more than one year. With inflation in China generally low, the bank said the time was ripe for such steps. “This marks another important step forward in interest rate marketization reforms for our country,” it said.

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