28/06/2015 03:28 AST
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.
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 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 latest move could also be aimed at comforting investors following a 20 per cent plunge in the country’s stock markets over the last two weeks, some analysts said.
“The simultaneous cuts in interest rates and reserve requirement is a forceful move, indicating the downward pressure on the economy is very big,” said Xu Hongcai, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think tank.
“The monetary policy adjustment will also help curb sharp fluctuations in the stock market.” 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.
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. That has further squeezed manufacturers struggling with tepid demand.
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 4.85 per cent, and reducing the one-year benchmark deposit rate by 25 basis points to 2 per cent.
The central bank also lowered the reserve requirement ratio (RRR) for banks that have met certain standards in lending to the farm sector and small and medium-sized enterprises by 50 basis points.
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 move highlights rising concern over the SOE sector where bad debt is concentrated and profit margins are being squeezed.
The central bank has frequently made such targeted cuts in RRR to spur lending into certain sectors, but the impact has been limited since banks are often reluctant to lend to these sectors amid concerns over collateral and risk.
GROWTH SLOWDOWN The interest rate and RRR cuts will “help stabilise growth, adjust structures and lower social financing costs”, the central bank said.
Going forward, the central bank will “continue to implement prudent monetary policy, use various policy tools to strengthen and improve march-prudential management, optimise policy combinations and create neutral and appropriate monetary and financial environments for economic adjustments and upgrading.” The government is due to release second-quarter GDP data on July 15 and many economists expect growth to dip below 7 per cent, which would be the weakest performance since the depths of the global financial crisis.
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