China cuts rates, reserve ratio to aid economy as stocks sink

[August 25, 2015]  BEIJING (Reuters) - 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 shockwaves around the globe.

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

The latest policy easing also followed a shock devaluation in the yuan <CNY=CFXS> 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 percent. The rate cut, the fifth since November, would be effective from Aug. 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 percent for most big banks. The change will be effective on Sept. 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 percent 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 percent.

(Reporting by China Economics; Editing by Will Waterman)

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