China cuts interest rates again to support economy

27 Jun 2015 | Author: | No comments yet »

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

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. 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. 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. In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People’s Bank of China said on its website Saturday. 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.

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. 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.

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.

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. 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.

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