China fell back on its major levers to stem the biggest stock market rout since 1996 and a deepening slowdown, cutting interest rates for the fifth time since November and lowering the amount of cash banks must set aside.
The one-year lending rate will drop by 25 basis points to 4.6% effective Wednesday, the Beijing-based People's Bank of China said on its website Tuesday, while the one-year deposit rate will fall a quarter of a percentage point to 1.75%. The required reserve ratio will be lowered by 50 basis points for all banks to cover funding gaps, the statement said.
The Shanghai Composite index fell 7.6% on Tuesday to an eight-month low before the actions.
China's surprise yuan devaluation on Aug. 11 led to a tightening in liquidity as the PBOC subsequently bought its currency to stabilize the exchange rate and curb capital outflows. The yuan might face more downside pressure as a result of the latest monetary easing, making it harder to keep depreciation in check. A 22% stock market plunge over four days added pressure for broad stimulus as authorities pull back from other direct efforts to boost equities.
“The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market-based methods to boost market momentum and help the real economy,” said Lu Ting, chief economist at Huatai Securities Co. “Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.”
European shares clawed back some losses after their biggest decline since the 2008 financial crisis and futures signaled U.S. equities will rally after entering a correction. Russia's ruble led a rebound in developing-nation currencies as raw-material prices advanced from the lowest level since 1999. Chinese stock-index futures surged.
China's acceleration of monetary easing underscores policymakers' determination to meet Premier Li Keqiang's 2015 growth goal of about 7%. The economy's fundamentals haven't changed, Mr. Li said in a statement on the government's website, adding there's no basis for the yuan to depreciate continuously, and that China is able to keep the exchange rate basically stable at a reasonable level.
The economy still faces downward pressure and the task of stabilizing growth, adjusting its structure, pushing reforms and improving living standards is very challenging, the PBOC said in a Q&A-style statement released after the move. Given volatility in global financial markets, “we need to use monetary policy tools more flexibly,” it said.