China has resorted to cutting its interest rates for the fifth time since November in order to spur economic growth. The Chinese market experienced its worst day in eight years yesterday and has had a stiff couple of months.
A clear financial crisis is taking shape, eroding its stock market and mopping up liquidity. The Chinese authorities are now resorting to extreme measures to contain the damage and revive the ailing economy.
Already facing the biggest market glut since 1996, China’s one year lending rates will effectively drop by 25 basis points to 4.6 per cent beginning Wednesday. A statement from the People’s Bank Of China (PBOC) confirmed the drop in interest rates while also announcing the lowering of required reserve ratios by 50 basis points. One year deposit rates will fall by a quarter to 1.75 per cent.
Through lowering the bank interest rates, the PBOC seeks to effectively grant citizens easier terms to borrow from banks. This borrowing, they hope, will result in more spending in the economy thus stimulating growth. The lowering of reserve ratios will compound this as banks lend more capital to businesses and individuals in a bid to stir the economy.
The acceleration of monetary easing evidences premier Li Keqiang’s goal for growth by about 7 per cent this year. However, analysts have predicted that the goal may not materialize with the prevailing economic conditions in Asia’s largest economy.
China devalued its currency on Aug. 11, risking huge capital outflows and tighter liquidity.
Economic readings are weaker than forecasted while the stock market has in the past four days plunged by 22 percentage points. Monetary easing may be the only hope for China at this moment and the latest round of interest rate lowering may not be its last.
Lu Ting, Chief economist at Huatai Securities Company said, “The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy,”
Mark Williams, Chief Asia economist at Capital Economics Limited said, “The move may halt the market slide but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”
The interest rate cuts caused a domino effect on other international markets. In London, the FTSE 100 jumped 3.3 percent while in Germany, the DAX went up 4.4 per cent and in Paris, the CAC rose by 4.6 per cent. Other European markets in Lisbon, Milan and Madrid also went up sharply.
China’s lowering of interest rates follows closely the rebasing of their currency to allow for a harsher fall. Through these policies that are largely market oriented, the conservative nationalist government seeks to halt the bleeding economy and allow for a more flexible recovery.
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