China cuts interest rates again to support economy

[June 27, 2015]  BEIJING (Reuters) - China's central bank cut lending rates for the fourth time since November and trimmed the amount of cash that some banks must hold as reserves, stepping up efforts to support an economy that is headed for its poorest performance in a quarter century.

The People's Bank of China (PBOC) said on its website on Saturday that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.85 percent, and reducing the one-year benchmark deposit rate by 25 basis points to 2 percent.

The bank lowered the reserve requirement ratio (RRR) for banks lending to the farm sector and small and medium-sized enterprises by 50 basis points.

The interest rate and RRR cuts, will “help stablise growth, adjust structures and lower social financing costs”, the central bank said. Going forward, the central bank will “continue to implement prudent monetary policy, use various policy tools to strengthen and improve marco-prudential management, optimise policy combinations and create neutral and appropriate monetary and financial environments for economic adjustments and upgrading.”

China last cut interest rates on May 10, lowering one-year benchmark lending rates by 25 basis points to 5.1 percent, and lowering one-year benchmark deposit rates by 25 basis points, to 2.25 percent.

The central bank last cut the reserve requirement ratio for all commercial banks by 100 basis points on April 19 - the deepest single reduction since the depth of the global financial crisis in 2008 - following a 50-basis-point cut in February.

Such system-wide RRR cuts result in large amounts of liquidity flowing back into monetary supply. Targeted cuts, like that announced on Saturday, are not likely to have the same effect.

The central bank has frequently made targeted cuts to spur lending into certain sectors, but they rarely have a significant wider macroeconomic effect, since banks are often reluctant to lend to these sectors amid concerns over collateral and risk.

Weighed down by a property downturn, factory overcapacity and local debt, growth in China's economy is expected to slow to a quarter-century low of around 7 percent this year. That is down from 7.4 percent in 2014, even with expected additional stimulus measures.

While more cuts had been expected as economic growth sputters, Saturday's changes follow a plunge of 20 percent in China's stock markets in the last two weeks.

Despite the drumroll of rate cuts, the real cost of borrowing in China remains stubbornly high, due in part to cooling inflation and banks' reluctance to pass lower rates on to customers. That has further squeezed manufacturers struggling with tepid demand.

(Reporting by Kevin Yao and Nicholas Heath; Editing by Raju Gopalakrishnan)

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