Well they finally did it.
China’s central bank cut interest rates for the sixth time since November on Friday, and lowered the amount of cash that banks must hold as reserves in another effort to jumpstart a slowing economy.
The People’s Bank of China lowered the one-year benchmark bank lending rate by 25 basis points to 4.35%, effective from Oct. 24.
The reserve requirement ratio will be cut by 50 basis points for all banks, taking the ratio to 17.5% for the country’s biggest lenders, the PBOC said in a statement.
Asia Unhedged has been calling for the PBOC to loosen its tight monetary policy and take more aggressive action to stimulate the world’s second-largest economy to get it moving again.
The US Fed decision last month not to raise interest rates gave China’s government the opening to cut theirs. The dollar had been strengthening on expectations of a rate hike. But now, global markets are anticipating no rate hike for the foreseeable future — this is good for the yuan.
Asia Unhedged has argued for many months that China’s monetary policy has been much too tight to provide the necessary breathing space for the real economy and sustain stock market gains. Lower bank reserve requirements enacted Friday should flood the market with more liquidity making easier for small- and medium-sized businesses to get credit. These firms are the foundation for economic and jobs growth. The RRR cut should also help resuscitate A- and H- shares.
Of course, this will bring out all the naysayers who will say that the recent announcement of 6.9% growth in GDP seriously scared the government that prediction of 7% growth for the year wasn’t going to happen and that the rate cut is intended to get the numbers back up in order to meet these expectations.
The recent news of China’s economic slowdown had shown investor’s worldwide that a weaker Chinese economy is bad news for the global economy. The news of the easing was well received and sent global markets surging with European stock markets posting significant gains. US stocks also surged.
Let’s hope the PBOC didn’t take too long to act and that the latest interest rate cut has the desired effect.