China cuts rates again to spur slowing economy

  • Agencies, Beijing
  • Updated: Oct 23, 2015 23:19 IST
This picture shows a Chinese worker checking a machine making blankets for exports at a factory. (AFP)

China cut interest rates on Friday for the sixth time in less than a year and lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy.

The announcement came after growth slowed to a six-year low of 6.9% in the latest quarter, according to official figures, dragged down by weak global demand and an effort to reduce reliance on construction and heavy industry.

The benchmark rate on a one-year loan will fall by 0.25% point to 4.35% effective Saturday, the central bank announced. The benchmark rate for a one-year bank deposit will be reduced by the same margin to 1.5%.

“There still exists some downward pressure on China’s economic growth,” the People’s Bank of China said in a statement. “We need to continue to use monetary policy tools to strengthen economic structural adjustment and create a good monetary and financial environment.”

Also Friday, the central bank increased the amount of money available for lending by reducing the level of reserves banks are required to hold.

Most bank lending goes to government companies, rather than to the entrepreneurs who generate most of China’s news jobs and wealth. So the immediate impact of rate cuts is to lower financing costs for state industry.

The reduction in the reserve requirement ratio for banks was a preemptive move to support liquidity in the banking industry, the PBOC said. The targeted cut aimed at better supporting the rural sector and small businesses.

“Conditions were mature for the removal of a ceiling on deposit rates,” the central bank said. After the liberalisation, the PBOC’s interest rate adjustment will rely more on market-based monetary policy tools.

Much of China’s 5-year-old decline in economic growth is self-imposed as the ruling Communist Party tries to steer the country to a more sustainable expansion based on domestic consumption instead of exports and investment.

The unexpectedly sharp slowdown over the past year has sparked concern that growth was falling too abruptly, raising the danger of job losses and unrest. That prompted Communist leaders to start cutting interest rates last November and to launch mini-stimulus measures through higher spending on building public works.

Factory activity weakened in the latest quarter while retail sales growth accelerated in a positive sign for efforts to promote a consumer-led economy. But, credit growth is picking up.

“Fears that the economy was rapidly decelerating seem to have receded,” Mark Williams of Capital Economics said in a report.

“Admittedly, we’re still waiting for clear evidence of an economic turnaround,” Williams said. “Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”

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