China cuts rates, reserve ratio to aid economy as stocks sink

China’s central bank cuts interest rates and simultaneously relaxes reserve requirements for the second time in two months.

LONDON, ENGLAND, UK (AUGUST 25, 2015) (REUTERS) – China’s central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday (August 25), ratcheting up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.

The move came as Chinese stock indexes nosedived more than 7 percent on Tuesday to hit troughs not seen since December, and after shares had plunged over 8 percent on Monday.

The latest policy easing also followed a shock devaluation in the yuan two weeks ago, a move that authorities billed as aiding financial reforms. But some saw the move as the start of a gradual slide in the currency to help stumbling exporters.

The People’s Bank of China (PBOC) said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6 percent. The rate cut is the fifth since November.

Market Analyst at IG, Alistair McCaig said there was still room for manoeuvre.

“The aggressive reaction we’ve seen in the equity markets have arguably forced the Chinese government’s hand here, certainly the People’s Bank of China have cut a number of times as far as the interest rate is concerned and there is a lot of room for manoeuvre for both the interest rate and also the reserve ratio requirements,” he said.

One-year benchmark deposit rates were also reduced by 25 basis points, while the ceiling for deposit rates with tenures of over a year was scrapped to further free up China’s interest rate market.

At the same time, the PBOC said it was also lowering the reserve requirement ratio by 50 basis points to 18.0 percent for most big banks. The change will be effective on September 6.

China’s currency devaluation and a near-collapse in its stock markets in early summer have sparked fears that the world’s second-largest economy is at risk of a hard landing.

A private survey showed activity in China’s factory sector shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled.

China’s economy grew an annual 7 percent in the second quarter, steady with the previous quarter and slightly better than analysts’ forecasts, though further stimulus is still expected.

The government has in recent months rolled out a flurry of steps to try to put a floor under the economy, including repeated cuts in interest rates and bank reserve requirement and faster infrastructure spending.

But analysts believe the government may have to keep up its policy stimulus in the rest of the year to combat headwinds and achieve its full-year growth target of around 7 percent.

“We have anticipated a prolonged period into the future in which global growth, but not recession would continue but as at a somewhat subdued pace. We don’t think that we are inclined to change that position albeit that we have to accept that with Chinese economic weakness perhaps progressing into other parts of Asia and the emerging economies given the commodity and energy price collapse, the risks are somewhat to the downside,” said Jeremy Batstone-Carr, chief strategist, Charles Stanley.

Oil prices also stabilised, however, after plunging more than 6 percent and hitting 6 1/2-year lows.

U.S. crude futures traded at $38.73 per barrel, up 1.2 percent on the day, while Brent crude futures last stood at $43.03 after having fallen to $42.23 on Monday. Copper nudged up a fraction too to $4,956 a tonne.