26 October 2016
Zhou Xiaochuan is hoping to reassure investors that he has got their back. Photo: Bloomberg
Zhou Xiaochuan is hoping to reassure investors that he has got their back. Photo: Bloomberg

China cuts interest rates to record low as stocks slump

After the biggest two-week plunge in China’s stock market since December 1996, People’s Bank of China governor Zhou Xiaochuan cut interest rates to a record low at the weekend.

The move is reminiscent of a strategy pursued by former US Federal Reserve chairman Alan Greenspan, who lowered rates after market meltdowns in what became known as the “Greenspan put”, Bloomberg reported.

The Shanghai Composite Index fell 7.4 percent Friday, taking its decline from its June 12 high to 19 percent, on the cusp of a bear market.

The central bank announced late Saturday it was cutting the benchmark lending rate by 25 basis points (0.25 percentage point) to 4.85 percent and the deposit rate, also by a quarter percentage point, to 2 percent.

Required reserve ratios for some banks will also be reduced.

“Similar to the Greenspan put after Black Monday in 1987, this time it’s the PBoC’s turn to play ‘put’ after Black Friday,” the report quoted Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, as saying.

One trigger that prompted the stock sell-off Thursday and Friday was the PBoC’s addition of funds to the banking system Thursday via reverse-repurchase agreements, a step market players interpreted as reducing the odds of near-term monetary stimulus.

“These movements confuse the market,” Hu said.

“The rate cut following recent turmoil in China’s equity market gives the impression that Chinese officials are engineering a put, trying to support flagging investor confidence,” Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc, was quoted as saying.

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