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China's central bank cuts rates in new bid to spur economy

business Updated: Sep 22, 2015 11:57 IST

A man looks at market indices at a stock quotation board outside a brokerage in Tokyo, August 24, 2015. Alarm bells rang across world markets on Monday as a 9% dive in Chinese shares and a sharp drop in the dollar and major commodities panicked investors (REUTERS Photo)

China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stuttering economy and a plunging stock market that has sent ripples around the globe.

The move came as Chinese stock indexes nosedived more than 7% on Tuesday to hit troughs not seen since December, and after shares had plunged over 8% on Monday.

The latest policy easing also followed a shock devaluation in the yuan two weeks ago, a move that authorities billed as aiding financial reforms, but that some saw as the start of a gradual slide in the currency to help stumbling exporters.

"Frankly this shows a bit of panic in my mind," said Andrew Polk, resident economist at the Conference Board in Beijing. "This is a big-bang move," he said. "It's meant to address some real issues and also prevailing market sentiment over the past two days."

The People's Bank of China (PBOC) said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6%. The rate cut, the fifth since November, would be effective from August 26.

One-year benchmark deposit rates were also reduced by 25 basis points, while the ceiling for deposit rates with tenures of over a year was scrapped to further free up China's interest rate market.

At the same time, the PBOC said it was also lowering the reserve requirement ratio by 50 basis points to 18.0% for most big banks. The change will be effective on September 6.

China's currency devaluation and a near-collapse in its stock markets in early summer have sparked fears that the world's second-largest economy is at risk of a hard landing that will hammer world growth and send world markets into a tailspin.

A private survey showed activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled, adding to worries that the economy may be slowing sharply.

China's economy grew an annual 7% in the second quarter, steady with the previous quarter and slightly better than analysts' forecasts, though further stimulus is still expected.

The government has in recent months rolled out a flurry of steps to try to put a floor under the economy, including repeated cuts in interest rates and bank reserve requirement and faster infrastructure spending.

But analysts believe the government may have to keep up its policy stimulus in the rest of the year to combat headwinds and achieve its full-year growth target of around 7%.

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