China cuts key interest rates to spur growth

24 October 2015

China, the world's second-largest economy, yesterday resorted to surprise cuts in lending and deposits rates to stimulate growth in the slowing down economy, which registered its worst quarterly performance since the onset of the global financial crisis.

The chinese central bank, People's Bank of China (PBOC), slashed the benchmark one-year lending and deposit rates by 0.25 per cent to 4.35 per cent and 1.5 per cent respectively, aiming to further reduce the cost of financing, according to a PBOC statement.

This is the sixth time this year the central bank has cut the key interest rates in a bid to support the economy which posted a 6.9 per cent GDP growth in third quarter. The government's growth target for the year is 7 per cent.

Additionally, the bank has also lowered the deposit reserve requirement ratio for big banks by 0.5 per cent to 17.5 per cent to boost liquidity in the banking system. For the county level financial institutions, the ratio is further reduced by 0.5 per cent to stimulate the agricultural sector and small and micro-enterprises.

In another major move, the central bank has also removed caps on deposit rates to bring competition among lenders and make better use of the money for private businesses as well as improve household savings.

The central bank said it will continue to manage rates to control borrowing costs.

"This is necessary to release more liquidity and stabilize market expectations, as September's producer price index, which measures wholesale inflation, contracted for the 43th-consecutive month,"  Xu Hongcai, economist from a Beijing-based Chinese think tank told  Xinhua news agency.

China's consumer price index in September was 1.6 per cent over a year ago, compared to 2 per cent in August, which paved the way for the rate cuts, according to Xu.

Just a day earlier, the European Central Bank (ECB) kept its rates unchanged at a record low of 0.05 per cent, saying that monetary policy alone cannot solve euro zone's economic vows and called on member nations to take additional actions alongside. (See: ECB keeps rates unchanged to support growth).

According to latest media reports, the Chinese national currency yuan, the value of which is controlled by PBOC, is likely to join the International Monetary Fund's basket of reserve currencies soon, which would make the country more market oriented.

In a separate notice today, the PBOC has allowed foreign central banks and similar institutions to access Chinese forex market and trade all forex products including spots forwards swaps and options without any quota restrictions.

Further to China's rate-cut news, stock markets worldwide posted impressive gains on Friday.

The S&P 500 index surged 1 per cent while the Dow Jones Industrial average was up 0.9 per cent and Nasdaq 2.7 per cent.  The UK's FTSE 100 rose over 1 per cent, Japan's Nikkei 225 2.1 per cent, China's Shanghai composite 1.3 per cent, India's BSE Sensex 0.7 per cent and Germany's DAX 2.9 per cent on yesterday's trade.

 search domain-b