China’s central bank took some aggressive steps on Saturday to boost its slowing economy.
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As part of the government’s effort to achieve stronger growth, China’s central bank has recently cut both the benchmark interest rates and the requirement reserve ratio (RRR), the required amount of reserves a bank should hold. The one-year deposit rate was lowered to 2 percent, while that of the lending rate is now 4.85 percent. But Saturday’s moves, which included the fourth reduction in interest rates since November, were unusual in so closely following a stock market nose dive.
ANZ’s Mr Liu and Mr Zhou expect the PBOC to cut the RRR by another 100 basis points this year and said interest rates could be lowered by another quarter percentage point in the second half.
While all of that is true, China still has relatively high interest rates, and so has much room to cut them as well as to cut the China reserve-requirement because it is also very conservative.
ANZ economists Liu Ligang and Raymond Yeung said in a research note Thursday: “Since commercial banks will be allowed to lend more from their deposit base, the change can help lower cost of borrowing and improve monetary policy transmission mechanism”.
China’s economy grew about 10 per cent annually between 1982 and 2012, but that expansion has slowed, coming in at just 7 per cent in the first quarter of this year, sparking fears the economy is settling into a protracted period of subdued growth. 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.
The benchmark Shanghai Composite Index has slumped 18.8% from a peak of 5,178.19 points on June 12.
While he allowed this might not be the actual intention of the central bank, the effect would be the same, given ultimate demand for bank loans has stayed weak.
The stock market has been through a nightmarish two weeks following moves to cool debt-fueled rallies and investors’ concerns about bubbles.
Over the weekend, Greece failed to strike a deal with its global lenders to secure more emergency funding, which it desperately needs before June 30 to repay its loans. That is down from 7.4 percent in 2014, even with expected additional stimulus measures.
A banker at one of China’s “big five” state owned banks said he believed the easing was “more like a bailout for the falling stock market”.
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The stock market crash on Friday also has affected today’s policy decision.
