Central bank makes 4th interest rate cut as market slumps

Central bank makes 4th interest rate cut as market slumps

China’s central bank announced Saturday the fourth round of interest cuts in seven months and lower deposit-reserve ratios for some banks to lend to small and rural businesses, as Beijing tries to shore up the country’s sluggish economy.
The announcement for the world’s second-largest economy also followed a nearly 20 percent drop in China’s stock market over the past two weeks.
The People’s Bank of China said it would cut the rate on a one-year loan by commercial banks by 0.25 percentage point to 4.85 percent. The interest rate paid on a one-year deposit would be lowered by 0.25 point to 2 percent.
Rates were cut on Nov. 22, March 1 and then May 11. The new rates took effect yesterday.
The central bank also said it would lower the deposit-reserve ratios by 50 points for some banks that are lending to small businesses and agriculture-related businesses, a move that would ease lending for the private sector by cutting the amount of reserves the banks are required to hold.
“The cuts will support the adjustment of economic structure, support the real economy, and lower financing costs,” said Yao Yudong, director for the People’s Bank Finance Research Institute, in an interview by the state broadcaster China Central Television.
“The prudent monetary policy remains unchanged,” Yao said.
The state-owned banking industry lends mostly to state companies, so the new measure is expected to inject more credit into rural and small businesses.
“The purpose of the oriented lowering of deposit-reserve ratios would boost financial institutes’ abilities to support rural, agricultural and small businesses,” according to an explanatory note posted on the central bank’s website. “It would improve the key areas and weak links in the national economy. It is conducive for the financial institutes to support entrepreneurship.”
Communist leaders have affirmed their commitment to a “new normal” of slower, more sustainable growth but are very sensitive to the potential for political unrest in the event unemployment spikes up.
The country’s economic growth has slowed to the lowest level since the aftermath of the 2008 global crisis. Over the past two weeks, its stock market— which had been performing extraordinarily well — tumbled.
On Friday, the Shanghai index fell 7.4 percent, and the Shenzhen composite dropped 7.9 percent. AP