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China’s central bank cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside, stepping up efforts to stem the biggest stock market rout since 1996 and a deepening economic slowdown.
The one-year lending rate will drop by 25 basis points to 4.6 percent effective Wednesday, the Beijing-based People’s Bank of China said on its website Tuesday. The one-year deposit rate will fall by 25 basis points to 1.75 percent.
The acceleration of monetary easing underscores policy makers’ determination to meet Premier Li Keqiang’s 2015 growth goal of about 7 percent. The risk of capital outflows and tighter liquidity after China devalued its currency on Aug. 11, weaker-than-forecast economic readings, and a 22 percent stock market plunge over four days added pressure for more stimulus.
“Clearly, this is targeted at the falling stock market,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “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.”
The economy still faces downward pressure and the task of stabilizing growth, adjusting its structure, pushing reforms and improving living standards is very challenging, the PBOC said in a Q&A-style statement released after the move. Given volatility in global financial markets, “we need to use monetary policy tools more flexibly,” it said.
The PBOC on Aug. 11 said it will allow markets greater say in setting the currency’s level, which spurred the biggest devaluation in two decades and threatens to trigger an outflow of capital. The PBOC has since intervened to stem losses.
Global markets have plunged since the move, with emerging market currencies and commodities among the worst hit. China stock futures rallied after the PBOC’s announcement.
Deflation risks, over-capacity and a debt overhang remain a cloud over an economy forecast for its slowest expansion since 1990. Industrial production, investment and retail data all trailed analysts’ estimates in July.
Before today’s move, central bank Governor Zhou Xiaochuan had already this year lowered the required reserve ratio twice, with an additional move targeted to certain banks. Officials are also acting to boost lending including at the country’s policy banks.
Bloomberg’s monthly gross domestic product tracker suggests the economy expanded at a 6.6 percent pace from a year earlier in July.