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China central bank cuts rates, reserve ratio to aid stumbling economy

China’s central bank cut interest rates on Tuesday and said it would pump liquidity into the banking sector as plummeting share prices startled investors.

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With about 25 trillion yuan (US$3.9 trillion) of bank deposits still locked up as reserves and the benchmark one-year interest rate at 4.85 per cent, the People’s Bank of China has an ample monetary policy arsenal at its disposal.

As I reported yesterday, Augusts past have been littered with spasms in markets because trading volumes are usually thin as many investors (and their advisors) are away on holiday. It comes as pessimism about the state of the country’s broader economy is intensifying, forming a lethal combination that has sent global markets into a tailspin.

But although the slowdown in the Chinese economy will have a bearing on Chinese firms’ profitability, many view the stock market as grossly inflated.

China’s stock index futures and European equities rose.

Shanghai shares see-sawed in early trade Wednesday, after Beijing’s move to cut interest rates and free up cash for banks failed to restore confidence in China’s growth and arrest the crisis that has rattled global markets. Communist leaders say they can tolerate lower headline growth so long as the economy generates enough jobs. The PBOC has since intervened to stem losses.

Various other factors are contributing to the market turbulence, including the speculation over a U.S. interest rate hike that could result in the pullout of funds from currency and stock markets in emerging economies.

“It is not the role of the central bank to elevate sentiments unduly, to deliver booster shots to the stock market so that it can soar for a while, only to collapse when reality hits”, he told a conference in Mumbai on Monday. Some officials argue that falling stocks will have a limited impact on the world’s second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private.

“With the government’s efforts to prop up equity prices through direct purchases in tatters, policymakers have changed tack”, Mark Williams, chief Asian economist at Capital Economics, told Bloomberg News. And that doesn’t just mean China’s economy is slowing. Industrial production, investment and retail data all trailed analysts’ estimates in July.

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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. Officials are also acting to boost lending including at the country’s policy banks.

Traders signal offers in Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange on Monday