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[BEIJING] China’s central bank on Tuesday cut its benchmark interest rates and the amount of cash banks must keep on hand, the latest stimulus aimed at boosting the world’s second-largest economy as it battles a collapse in share prices.
The People’s Bank of China (PBoC) announced on its website that it was reducing lending and deposit interest rates by 0.25 percentage points each and its reserve requirement ratio (RRR) by 0.50 percentage points. The moves take effect Wednesday, it said, and follow similar tandem cuts in late June.
China’s “economic growth rate remains under pressure", the PBoC said in a statement, adding the cuts were meant in part to “support the real economy to continue to develop healthily”.
It has now cut benchmark interest rates five times since November as authorities try to head off a too sharp deceleration in economic growth. The lending rate was cut to 4.60 percent while the deposit rate was reduced to 1.75 percent, the bank said.
Reducing the RRR is also a stimulatory measure as it increases the amount of money banks can lend, so can boost economic activity.
China’s plunging share markets and rising concerns overseas about its growth outlook have spurred a global rout in equity markets amid concerns the world economy could suffer if China’s weakens too precipitously.
“The cuts in interest rates and the reserve requirement ratio are a reasonable and necessary step taken by the government,” Chen Jiahe, chief strategist at Cinda Securities, told AFP. “On the one hand, it can support the real economy. On the other hand, it’s positive for the capital markets.” Chinese share prices collapsed in mid-June after a year-long debt-fuelled rally and while a massive government support programme provided a temporary boost, panic selling has set in again.
China is a key driver of the global economy and even though expansions have been steadily slowing in recent years, concern has intensified that the situation is worse than the country’s official data show.
Growth in China’s gross domestic product (GDP) recorded its worst performance in nearly a quarter century last year, expanding 7.4 percent. Results for the first and second quarters of this year showed growth slipped to 7.0 percent. The 7.0 percent GDP growth figure for the April-June quarter – which matched the government’s official target of “about 7.0 percent” – surprised economists given that various data components during the period had been generally weak. The target figure, announced in March, was a reduction from last year’s objective of about 7.5 percent, and was seen by economists as official recognition of the need for slower growth.
China has long faced accusations that the government massages economic figures and that actual growth is considerably lower than official figures show, a view that has come into renewed focus.
Chinese authorities say they recognise that annual double-digit GDP expansions of the past cannot be sustained as the country’s economy matures and have committed to a more sustainable “new normal” growth model that makes consumer spending the key driver.