ifreepress-The bank said on Saturday through its website that the one-year lending rate would be lowered 25 basis points and be 4.85% as of June 28. That’s why it says a new RRR cut will only be applied for commercial banks in rural areas, agriculture and small businesses.
The central bank has rarely cut both interest rates and the reserve-requirement ratio on the same day. Though some characterised it as such, China’s easing, on a closer read, is more calibrated than that.
The smaller Shenzhen index and the ChiNext index, which consists mostly of high technology and startups, fell even more drastically and fully entered bear-market territory last week. “It’s hard when you have a tiger by the tail”.
“The fact is, cash will be flowing to the stock market by way of wealth management and structured products”, he said.
But others said the moves were largely triggered by data pointing to a further decline in growth in the world’s second-largest economy.
The lower ratio and the reduced interest rates were to take effect Sunday.
“Similar to the Greenspan Put after Black Monday in 1987, this time it’s the PBOC’s turn to play ‘put’ after Black Friday”, said Larry Hu (胡偉俊), head of China economics at Macquarie Securities Ltd in Hong Kong. And what PBOC Governor Zhou Xiaochuan intended by these moves still isn’t clear.
But the timing of the decision has led many to conclude that it was the stock market alone that drove the decision.
“The rate cut following recent turmoil in China’s equity market gives the impression that Chinese officials are engineering a put, trying to support flagging investor confidence”, said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC.
Keeping the stock market buoyant, through measures like the interest rate cut, could help the Chinese government sell part of its stakes in government-owned enterprises that have incurred huge debts.
The strategy of the central bank of China involves transferring short-term liquidity from the banks to long-term funds. Over the past two weeks, its stock market – which had been performing extraordinarily well – tumbled. However, most banks are expected to fulfill this requirement. “Banks will shrink, especially their deposit-taking and lending businesses”, said Gao Jian, ex- vice governor of China Development Bank. On Thursday, in an apparent move to calm the market, the PBOC, dubbed Yang Ma, or Big Mama, in China, injected 35 billion yuan into the system by using open-market operations for the first time in two months. Had the central bank done nothing, the rout would have been sure to deepen. On May 10, the bank lowered one-year benchmark lending rates and deposit rates by 25 basis points each, to 5.1 percent and 2.25 percent, respectively.
Mark Magnier contributed to this article.