China’s central bank said in a statement Tuesday it cut interest rates by one-quarter of a percentage point and reduced bank-reserve requirements by one-half of a percentage point. The reserve-rate cut effectively adds 678 billion yuan (about $105.7 billion) to the Chinese economy.
China’s main stock indexChina took fresh moves to free up money for its slowing economy, after global investors expressed concerns over Beijing’s management of the world’s No. 2 economy.
The PBOC also dropped a key control on rates for some bank deposits, allowing lenders greater freedom to compete for business.
The move comes after days of market turmoil in China and around the world, sparked in part by worries that Beijing won’t be able to stem market instability or rekindle slowing growth. China’s main stock index fell 7.6% on Tuesday after an 8.5% fall on Monday, bringing it down more than 20% over four trading days. Markets from Tokyo to London to New York also fell on Monday, hitting everything from stocks to currencies to commodities, before stabilizing on Tuesday.
In a statement posted on its website, the People’s Bank of China said the interest-rate cuts were aimed at reducing borrowing costs for Chinese companies, while the cut to bank-reserve requirements were intended to maintain “ample liquidity” in China’s financial system.
The Wall Street Journal reported on Sunday that the PBOC was planning to flood the market with liquidity.
The question for investors is whether the PBOC’s move Tuesday will restore–or further hurt–confidence in Beijing’s handling of the economy and markets. “They have a perfectly good reason to cut–they have room–but in the current environment some investors will say the economic situation must be really horrible if they did this,” CLSA global strategist Chris Wood.
China has targeted year-over-year economic growth of about 7% for 2015, which already would be the slowest pace in a quarter century. New data since July have called into question its ability to hit that target.
Meanwhile, a surprise 2% devaluation earlier this month of the country’s currency, the yuan, was interpreted by investors as a sign that economic growth is slowing more than Beijing had anticipated. The devaluation could help China’s exporters, which have seen soft global demand for their products. But the central bank subsequently intervened in the currency market to keep investors from pounding the yuan still weaker, buying up yuan from circulation. That squeezed funds out of China’s financial system.
China faces an “arduous task” to maintain economic growth and press ahead with reforms, the central bank said. It also pointed to the recent big selloffs in global markets, which the central bank said contributed to the need for the PBOC to deploy a variety of monetary-policy tools to ensure steady growth in China’s economy.
After the cuts, China’s benchmark one-year lending rate will be lowered to 4.6% from 4.85% previously, and the one-year deposit rate will fall to 1.75% from 2%, according to the PBOC.
The official reserve requirement ratio for most large banks in China will fall to 18% from 18.5% previously.
The PBOC also removed its control over fixed bank deposits with more than one-year maturity. Banks can increase other deposits by only 1.5 times the central bank’s set deposit rate.
The interest-rate cut is effective Wednesday, while the reserve-requirement reduction is effective Sept. 6. The rate cut is the fifth by the Chinese central bank since November, while the reserve-requirement cut for all banks is the third this year.