China central bank cuts benchmark interest rates

27 Jun 2015 | Author: | No comments yet »

China Cuts Interest Rates to a Record Low After Stocks Slump.

BEIJING — China’s central bank announced Saturday the fourth round of interest cuts in seven months and lower deposit-reserve ratios for some banks to lend to small and rural businesses, as Beijing tries to shore up the country’s sluggish economy. BEIJING—After more than a week of a brutal selloff in Chinese stocks, the country’s central bank on Saturday took a rare easing step, cutting both its benchmark interest rates and the amount of reserves certain banks are required to hold. Saturday’s combined easing highlights Beijing’s concerns that money isn’t flowing to some of the most-needed sectors in the economy and that stubbornly high borrowing costs that could fuel bankruptcies and job losses. The People’s Bank of China (PBOC) said on its website on Saturday that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.85 percent, and reducing the one-year benchmark deposit rate by 25 basis points to 2 percent. The central bank last cut the reserve requirement ratio for all commercial banks by 100 basis points on April 19 – the deepest single reduction since the depth of the global financial crisis in 2008 – following a 50-basis-point cut in February.

The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. The state-owned banking industry lends mostly to state companies, so the new measure is expected to inject more credit into rural and small businesses. “The purpose of the oriented lowering of deposit-reserve ratios would boost financial institutes’ abilities to support rural, agricultural and small businesses,” according to an explanatory note posted on the central bank’s website. “It would improve the key areas and weak links in the national economy. Some government economists have been calling for interest rate cuts to help lower real borrowing costs and help local governments to swap their maturing debt, although some private sector analysts have recently pared their expectations on policy easing. While industrial production and retail sales stabilized in May, investment slowed further — a sign of weakness in infrastructure spending that policy makers are keen to reverse. “The central bank doesn’t want a panic caused by the stock rout to spread,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That would lead to financial instability.” Premier Li Keqiang has set a growth target of about 7 percent for 2015, which would be the slowest annual expansion since 1990. China is battling excess industrial capacity, local-government debt and capital outflows, with the economy expanding at the slowest pace since 2009 in the first quarter.

It is conducive for the financial institutes to support entrepreneurship.” Communist leaders have affirmed their commitment to a “new normal” of slower, more sustainable growth but are very sensitive to the potential for political unrest in the event unemployment spikes up. Despite the drumroll of rate cuts, the real cost of borrowing in China remains stubbornly high, due in part to cooling inflation and banks’ reluctance to pass lower rates on to their customers. On Friday, the Shanghai Composite Index fell 7.4% and was off 19% since hitting a 52-week high on June 12, a decline that has wiped away $1.25 trillion in market capitalization, an amount roughly equal to the size of Mexico’s economy. While more cuts had been expected as economic growth sputters, Saturday’s changes follow a plunge of 20 percent in China’s stock markets in the last two weeks. A stock-market collapse would hurt investor confidence and hurt Beijing’s efforts to revamp the financial sector at a time when China is struggling with high debt levels and as the government is trying to steer the economy to one driven by private business and consumer spending, rather than infrastructure outlays and exports.

South Korea and New Zealand are among the latest to lower their key rates as China’s weakness combined with domestic dynamics to argue for further stimulus. “A plunge at that pace could have forced margin calls and another round of selling, leading to a stampede,” said Lu Ting, Chief Economist at Huatai Securities Co. “So avoiding panic in the financial market and protecting market confidence is part of the consideration.” The government has escalated efforts to prevent a hard landing, adding fiscal loosening to monetary easing. The near-20% decline in equity values in a matter of days—despite efforts to clamp down on margin lending—threatens to undermine recent progress on restoring growth momentum, said ING economist Tim Condon. “It’s difficult when you have a tiger by the tail. It lowered reserve requirement for finance companies by 300 basis points, which it said will help ease funding and costs pressure on state-owned enterprises.

The Ministry of Finance this week failed to meet its target at a bond auction for the first time since July 2014 amid the surge in municipal issuance. This reflects the central bank’s desire to stimulate the economy, fight deflationary pressure and respond to last week’s sharp market decline, she said. Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles.

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