25 October 2016
Investors despaired at the lack of policy action from Beijing in response to the deepening economic slowdown. Photo: Reuters
Investors despaired at the lack of policy action from Beijing in response to the deepening economic slowdown. Photo: Reuters

China cuts rates, reserve ratio after stocks plunge again

China’s central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months.

The moves came after Chinese stocks tumbled again on Tuesday.

Reuters said investors despaired at the lack of policy action from Beijing in response to recent data suggesting a deepening economic slowdown.

The People’s Bank of China (PBoC) said it was cutting the one-year benchmark bank lending rate by 25 basis points to 4.6 percent, cutting one-year benchmark deposit rates by the same amount, and reducing the reserve requirement ratio (RRR) by 50 basis points to 18 percent for most big banks.

Major Chinese stock indexes nosedived more than 7 percent on Tuesday, hitting their lowest levels since December, following a more than 8 percent plunge on Monday.

The slump had resumed last week despite Beijing’s efforts to arrest a 30 percent crash earlier in the summer with hundreds of billions of dollars of state-backed share purchases.

This time, the government appeared to be sitting on its hands until Tuesday’s response, which aimed more at shoring up economic fundamentals than underpinning stocks.

“Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its 7 percent growth rate fulfilled,” said Liu Li-Gang, China economist at ANZ Bank in Hong Kong.

Liu said the RRR cut was the most significant element of the PBoC action, as it would inject 650 billion yuan (US$101 billion) into the economy and ease concerns of a “hard landing”.

China, one of the main engines of the world economy, has overtaken Greece at the top of the worry list of global investors, who fret its economy is growing at a much slower pace than the official 7 percent target for this year.

“Currently, there is still downward pressure on China’s economic growth,” the central bank said in a separate statement. “There is also relatively big volatility in global financial markets, which require more flexible usage of monetary policy tools.”

Meanwhile, a PBoC researcher said expectations that the US Federal Reserve would raise interest rates next month was to blame for the recent global market volatility, the official Xinhua news agency reported.

Yao Yudong, head of the PBoC financial research institution, said the expected September US rate hike had been the “trigger” for the market swings.

German Finance Minister Wolfgang Schaeuble said the situation in China would be discussed by G20 nations.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 7.1 percent on Tuesday, while the Shanghai Composite Index fell 7.6 percent to close below the psychologically significant 3,000-point level. 

Underscoring the panic gripping the retail investors who dominate China’s stock markets, all index futures contracts fell by the maximum 10 percent daily limit, pointing to expectations of even deeper losses.

After the turmoil in China rocked world equity and commodity markets on Monday, policymakers elsewhere in Asia sought to soothe fears about the broader impact on the global economy.

“I think it’s important that people don’t hyperventilate about these types of things,” said Australian Prime Minister Tony Abbott, whose country is heavily exposed to China, the biggest consumer of its commodity exports.

“It is not unusual to see stock market corrections. It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound.”

This week’s steep declines have taken Chinese stocks into negative territory for the year to date.

However, Leland Miller, president of China Beige Book International, said Chinese equity markets have shown little correlation with the real economy — either on the way up or the way down.

“Previous boom-bust cycles in Chinese stocks have also shown little or no connection to [apparent] economic performance,” said Miller, whose firm provides anecdotal survey information about China based on the Fed’s “Beige Book” model.

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