World Economy

China Cuts Interest Rates to Record Low

China Cuts Interest Rates to Record LowChina Cuts Interest Rates to Record Low

China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and local government bond sales drained liquidity.

In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85% effective June 28, the People’s Bank of China said on its website Saturday. The one-year deposit rate will fall by 25 basis points to 2%, while reserve ratios for some lenders including city commercial and rural commercial banks will be cut by 50 basis points, according to the statement, Bloomberg reported.

The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilized in May, investment slowed further–a sign of weakness in infrastructure spending that policy makers are keen to reverse.

“The central bank doesn’t want a panic caused by the stock rout to spread,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That would lead to financial instability.”

Premier Li Keqiang has set a growth target of about 7% for 2015, which would be the slowest annual expansion since 1990. Policy makers are juggling the need to keep growth from slipping too far with plans to press ahead with reforms.

The PBOC’s easing has been four pronged. Lower interest rates reduce repayment expenses for the nation’s indebted businesses; cuts to banks’ reserve ratios gives them more scope to lend; money market operations aim to add liquidity; while targeted injections to banks channel funds to preferred projects such as shanty town redevelopment.

Past moves, such as an interest-rate cut announced May 10, have also followed selloffs in the share market.

“With economic growth still weak, inflation far below the PBOC’s target and a slumping equity market, monetary policy had to be eased,” Zhao Yang, Chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in an e-mail. “The magnitude is stronger than expected. I believe it’s closely related to the stock market plunge.”