China’s central bank has cut its benchmark interest rates and the amount of cash banks must keep on hand in a bid to boost the world’s second-largest economy as it battles a collapse in share prices.
The People’s Bank of China (PBOC) said on its website on Tuesday that it would lower the one-year bank lending rate by 25 basis points to 4.6 per cent.
The rate cut, the fifth since November, would be effective from Wednesday.
The move came as Chinese stock indexes nosedived more than 7 per cent on Tuesday to hit troughs not seen since December, and after shares had plunged over 8 per cent on Monday.
The latest policy easing also followed a shock devaluation in the yuan two weeks ago, a move that authorities billed as aiding financial reforms, but that some saw as the start of a gradual slide in the currency to help stumbling exporters.
“Frankly this shows a bit of panic in my mind,” resident economist at Beijing’s Conference Board, Andrew Polk, said.
“This is a big-bang move.
“It’s meant to address some real issues and also prevailing market sentiment over the past two days.”
One-year benchmark deposit rates were also reduced by 25 basis points, while the ceiling for deposit rates with tenures of over a year were scrapped to further free up China’s interest rate market.
At the same time, the PBOC said it would also lower the reserve requirement ratio by 50 basis points to 18 per cent for most big banks. The change will take effect on September 6.
China’s currency devaluation and a near-collapse in its stock markets in recent months have sparked fears that the country is at risk of a hard landing that will hammer world growth and send world markets into a tailspin.
A private survey showed activity in China’s factory sector shrank at its fastest pace in almost six-and-a-half years in August as domestic and export demand dwindled, adding to worries that the economy may be slowing sharply.
China’s economy grew an annual 7 per cent in the second quarter, steady with the previous quarter and slightly better than analysts’ forecasts, though further stimulus is still expected.
The government has in recent months rolled out a flurry of steps to try to put a floor under the economy, including repeated cuts in interest rates and bank reserve requirement and faster infrastructure spending.
But analysts believe the government may have to keep up its policy stimulus during the rest of the year to combat headwinds and achieve its full-year growth target of around 7 per cent.
European markets surge after ‘Black Monday’ losses
European stock markets roared back into the black on Tuesday, with most indices regaining much of the steep losses suffered the previous session on fears of a slump in China’s market.
In Tuesday trading at around 11:30am (GMT), London’s FTSE 100 index was up 3.53 per cent, the CAC 40 in Paris rose 4.58 per cent and the DAX 30 in Frankfurt climbed 4.28 per cent.
The trio had closed 4.67, 4.7 and 5.35 per cent lower respectively on Monday amid a global stock sell-off that wiped billions of dollars from equity markets.
Other emphatic rebounds in Europe on Tuesday included rises in Milan of 4.54 per cent, 4.64 per cent in Amsterdam, 4.36 per cent in Lisbon and the Athens market clawing 7.09 per cent back from the 10.54 per cent it lost during the previous “Black Monday” session.
Despite the bounce-back in Europe as traders hunted for bargains, however, many market-watchers warned of continuing volatility marked by successive rises and falls as focus returns to economic fundamentals – and ongoing doubts about China in particular.
“We are seeing signs of relief with European stocks opening higher despite China extending its losses,” said Piotr Matys, an emerging markets expert at Rabobank in London.
“We are trying to decouple but I think it’s too early to declare the worst is over … The way I see it is that this is a bit of a technical correction after things got a bit oversold.
Valentijn van Nieuwenhuijzen, head of multi-asset strategy at NN Investment Partners, agreed Monday’s market moves had gone too far.
“There are solid reasons to be worried about the global growth outlook … However, it is a risk – not yet a reality – (and) … Europe, US, Japan all show domestic demand is holding up quite well so far,” he said.
– with agencies