The new lending rate will be effective Wednesday.
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The bank has now cut interest rates five times since November in a bid to spur the slowing economy as concerns mount it may miss its seven percent growth target for the year. Chinese stocks plunged the most since 2007.
But until today there was a plausible argument that what happened on its financial markets was not of great significance for the rest of us, because those markets were still relatively closed to foreign investors and were subject to significant state meddling.
“Speculators are selling assets that seem the most vulnerable”.
The central bank also cut the one-year deposit rate to 1.75% in an effort to persuade Chinese savers to spend cash hoarded in the country’s banks. That’s 316 basis points lower than the average from 2005 to 2007. “It can remain stable at a reasonable and balanced level“.
Beijing reported economic growth held steady at 7 percent in the latest quarter but that was due to a stock market boom that pushed up the contribution from financial industries while other sectors weakened.
The central bank’s move was broadly welcomed by economists.
The debate about what central bankers can and should do is underway just as many of them prepare to travel to Jackson Hole, Wyoming, for the Federal Reserve Bank of Kansas City’s annual monetary policy conference. The bank said there is no ground for persistent and substantial depreciation.
“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. A surprise yuan devaluation earlier this month – which should boost exporters – led to fears the situation was worse than portrayed, exacerbated when a manufacturing survey last week reached its lowest for more than seven years. China needs extra liquidity to prevent systemic risks.
Bloomberg’s monthly gross domestic product tracker suggests the economy expanded at a 6.6 per cent pace from a year earlier in July.
But analysts have already put the rate rise back by as much as three months, until May, which would take full effect in August. “It is the only major country that has firepower”.
After decades of rapid growth, China is running out of steam.
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Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP, said the issue may be “Beijing’s willingness not its ability”. But creating a consumer economy is taking longer as households facing an uncertain job market tighten their belts.
