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China's central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and local government bond sales drained liquidity.
In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People's Bank of China said on its website Saturday. The one-year deposit rate will fall by 25 basis points to 2 per cent, while reserve ratios for some lenders including city commercial and rural commercial banks will be cut by 50 basis points, according to the statement.
The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilised in May, investment slowed further - a sign of weakness in infrastructure spending that policy makers are keen to reverse. "The central bank doesn't want a panic caused by the stock rout to spread," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong. "That would lead to financial instability." Premier Li Keqiang has set a growth target of about 7 per cent for 2015, which would be the slowest annual expansion since 1990. Policy makers are juggling the need to keep growth from slipping too far with plans to press ahead with reforms. PBOC Governor Zhou Xiaochuan's latest move adds to a global wave of monetary easing. South Korea and New Zealand are among the latest to lower their key rates as China's weakness combined with domestic dynamics to argue for further stimulus.
The Shanghai Composite Index sank 7.4 per cent, taking its decline from its June 12 high to 19 per cent. "A plunge at that pace could have forced margin calls and another round of selling, leading to a stampede," said Lu Ting, chief economist at Huatai Securities Co. "So avoiding panic in the financial market and protecting market confidence is part of the consideration."
