China scraps interest rate cap, fuels ailing economy fears

Just days after reporting its worst growth since the global financial crisis, China today unveiled a two-pronged action by scrapping control on how banks set the deposit rates and announced a further easing of its monetary policy to prop-up the world's second-largest economy's state.
The People's Bank of China (PBoC), in addition to cutting the interest rates by 0.25 percentage point and the reserve requirement ratio (RRR) by 0.50, also took its final step towards deregulating domestic interest rates by removing the ceiling on all bank deposit rates.
Reducing the RRR is also a stimulatory measure as it increases the amount of money banks can lend out, spurring the growth cycle.

The cutting of rates -- sixth since November -- are likely to lower corporate financing costs and funnelling liquidity into the economy, dragged by "downward pressure" as the Communist nation moves towards a consumption-driven growth.
"There still exists some downward pressure on China's economic growth," the central bank said in a statement.
"We need to continue to use monetary policy tools to strengthen economic structural adjustment and create a good monetary and financial environment."

From tomorrow, the RRR for financial institutions will be slashed by 0.5 percentage points, to further reduce the cost of financing, state-run Xinhua news agency reported.

The cuts came after China on Monday reported a 6.9 per cent GDP growth in the three months ending on September 30. It was the slowest since the global financial crisis in 2009.
The move also comes days ahead of ruling Communist Party's meet to set the direction of the ailing economy in the next Five Year Plan.
For China, deregulating domestic interest rates is a key requirement to win the IMF's endorsement of the renminbi as a global reserve currency, analysts say.
According to an IMFforecast, the world's second-largest economy was expected to further decline to 6.8 per cent this year from last year's 7.3 per cent and to 6.3 next year as

As China's economy continues to slow and global financial markets fluctuate, these moves aim to establish a sound financial environment for restructuring and steady growth of the economy, the PBoC explained.
The Chinese central bank had earlier made such a one-two move in August, amid a selloff of Chinese shares and worries over the economy following a surprise currency devaluation.