Tuesday, August 25, 2015

China cuts rate 25 bps, lowers reserve ratio 50 bps

    China's central bank cut its benchmark one-year lending rate by 25 basis points to 4.60 percent, the deposit rate by a similar 25 points to 1.75 percent and lowered the reserve ratio for major financial institutions by 50 basis points to 18 percent amid "greater volatility in global financial markets" and "downward pressure on economic growth."
    The People's Bank of China (PBOC) has now lowered its key rate by 100 basis points this year and by 140 points since it embarked on its easing cycle in November 2014.
    The PBOC said the rate cuts will take effect on Aug. 26 while the cuts in the reserve ratios, which will help boost liquidity in financial markets, will take effect Sept. 6.
    In addition to the cut in the reserve ratio for major financial institutions, the central bank also cut the ratio for lenders to rural areas and small businesses, such as commercial banks, credit cooperatives and other financial institutions, by 50 basis points.
    The reserve ratio for financial leasing companies, including car lenders, was slashed by 300 basis points to "to encourage it to play a good role in the expansion of consumption," the PBOC said.
    Continuing its process of liberalizing financial markets and allowing banks to compete against each other, the PBOC scrapped its ceiling on the rate that banks can offer customers on deposits with maturities of one year or longer. For deposits less than one year, the PBOC maintained its limit that banks can only offer its customers rates that are 1.5 times its benchmark rate.
     The rate cuts were widely expected following the recent rout in China's stock markets, declining exports and growing signs that growth this year will fail to reach the official target of 7.0 percent.
    Gross Domestic Product expanded by 1.7 percent in the first quarter from the fourth quarter for annual growth of 7.0 percent.
    Although China's inflation rate has risen in recent months, hitting 1.6 percent in July, the PBOC said rising pork prices had significantly affected the overall price level which remains at historically low levels, and the rate cut was aimed at further driving down the cost of financing.
    Chinese producer prices fell by 5.4 percent in July, the lowest level since October 2009, a sign of continuing excess production capacity in the world's second largest economy.
    In addition to recent cuts in the reserve ratios, the PBOC said it had implemented reserve repos, a medium-term lending facility, supplementary mortgage loans (PSL), with the reverse repos adding a total of 565 billion yuan of liquidity since August and PSLs adding 463.3 billion.
    To support the agricultural sector, the PBOC said it had increased credit by an annual 26.2 billion yuan by the end of July.



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