China has sought to calm its panic-stricken stock markets by cutting interest rates and loosening constraints on bank lending after a second day of plunging share prices.
The People’s Bank of China (PBoC) reduced the one-year lending rate to 4.6% in a clear signal that it was prepared to head off a repeat of the stock market crash that hit the country in June. The benchmark Shanghai Composite fell by 7.6% on Tuesday, bringing its loss in the last two days to more than 15%.
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.
China’s fifth interest rate cut since November lifted global markets, which recovered much of their losses after plummeting in response to China’s Black Monday.
The FTSE was up 190 points, or 3.2%, at 6,089 at 1200 BST and the Frankfurt Dax and Paris Cac were both up 4.5%. In New York, the Dow Jones was expected to rise more than 450 points after the opening bell.
China’s central bank also took half a percentage point off the reserve requirement ratio, which governs how much money banks can lend to the economy.
Interest rates in the country are now at an all-time low after having averaged 6.36% since a high of 10.98% in June 1996.
The People’s Bank said the interest rate cut aimed to reduce “the social cost of financing to promote and support the sustainable and healthy developments of the real economy”.
Analysts, however, said the timing was clearly designed to prevent a repeat of the panic selling of the previous two weeks. The announcement also included a cut in stamp duty on share trading.
Many expected the move to bring a temporary reprieve at best, unless Beijing can tackle the underlying problems that have driven economic growth down dramatically over the past 18 months.
Tao Dong, the chief regional economist at Credit Suisse, said: “Clearly, this is targeted at the falling stock market. China needs extra liquidity to prevent systemic risks. But ultimately, fixing the economy is more important than fixing the stock market and advancing reforms is critical.”
Andrew Polk, a senior economist at the Conference Board, an economics consultancy, said the PBoC had thrown “everything but the kitchen sink” at the crisis.
“Clearly the timing is all about the double-whammy of the stock market and downward pressure on the currency, both of which I’d argue they brought on themselves,” he said.
“They stood back and watched while the stock market ran up, then had a ham-fisted response when it fell. That created the need for a correction but made it more difficult to react.”
Earlier this month Beijing attempted to reduce the yuan’s value in an effort to boost exports and growth. Exports fell by an unexpectedly large margin of 8.3% in July, and a manufacturing survey has found that activity this month contracted at a faster rate than anticipated.
An initial cut of 2% in the yuan’s value against the dollar was followed by two further cuts before markets saw the move as an indication of weaker than expected growth and began again to sell shares in Chinese companies
Courtesy, The Guardian.