China again uses rate-cut mechanism to check market crisis

SHANGHAI: China fell back on its major levers to stem the biggest stock market rout since 1996 and a deepening slowdown, cutting interest rates for the fifth time since November and lowering the amount of cash banks must set aside.

The one-year lending rate will drop by 25 basis points to 4.6% effective Wednesday, the People’s Bank of China said on Tuesday, while the one-year deposit rate will fall a quarter of a percentage point to 1.75%. The required reserve ratio will be lowered by 50 basis points for all banks to cover funding gaps, it said.

China’s surprise yuan devaluation on August 11 led to a tightening in liquidity as the PBOC subsequently bought its currency to stabilise the exchange rate and curb capital outflows.

The yuan may face more downside pressure as a result of the latest monetary easing, making it harder to keep depreciation in check. A 22% stock market plunge over four days added pressure for broad stimulus as authorities pull back from other direct efforts to boost equities.

“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,” said Lu Ting, chief economist at Huatai Securities .