China central bank cuts interest rate by 25 basis points

28 Jun 2015 | Author: | No comments yet »

China Cuts Interest Rates After Market Plunge.

China’s central bank said today it would again reduce interest rates by 25 basis points, its fourth such cut since November as it tries to boost growth. BEIJING China’s central bank cut lending rates for the fourth time since November and trimmed the amount of cash that some banks must hold as reserves, stepping up efforts to support an economy that is headed for its poorest performance in a quarter century. The benchmark interest rate would be reduced to 4.85 per cent and the deposit rate to 2 per cent from tomorrow, the People’s Bank of China (PBoC) said on its website.

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 two measures send a signal that the government may not be eager to see an abrupt end to a stock market rally that has seen prices more than double in the last 12 months. The PBoC also announced that it will cut the reserve requirement ratios (RRR) by 50 basis points for commercial banks serving rural areas, agriculture and small businesses. The last time the central bank simultaneously cut interest rates and reserve requirements was at the height of the global financial crisis in late 2008. Young, often poorly educated investors have been betting on further appreciation even as business managers, with more information on the true health of their companies, have reportedly been selling heavily. “We think today’s move is mainly driven by the government desire to support a bull market,” Lan Shen and Shuang Ding, two economists at Standard Chartered, said in a statement on Saturday evening.

The bank said the latest moves were aimed at “stabilising growth” and “to further enhance the efficiency of monetary policy to (support) economic transformations” and are similar to cuts made last month. 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. Keeping the stock market buoyant, through measures like the interest rate cut, could help the Chinese government sell part of its stakes in government-owned enterprises that have incurred huge debts.

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. 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.

The moves have had mixed success as indicators remain subdued and domestic demand low, along with a sharp decline in foreign trade and a continued contraction in manufacturing. On Friday Chinese stocks plunged with Shanghai dropping 8.5 per cent at one point, its biggest loss in eight years, as investors that had flooded the market on margin trading – borrowing cash to buy stocks — ran for the door. Chinese equities, which more than doubled in value in the year to June 12, eventually closed down 7.40 per cent, or 334.91 points, at 4,192.87, its lowest point since the start of May. “The central bank doesn’t want a panic caused by the stock rout to spread,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong told Bloomberg News. 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.

Economic measures like monthly surveys of corporate purchasing managers show that the Chinese economy remains fairly weak but is no longer deteriorating. Weighed down by a property downturn, factory overcapacity and local debt, growth in China’s economy is expected to slow to a quarter-century low of around 7 percent this year.

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