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China cuts RRR, interest rates

Updated: Oct 23,2015 8:02 PM     Xinhua

The People’s Bank of China (PBOC), the central bank, on Friday cut the reserve requirement ratio (RRR) of banks, and the benchmark interest rates.

From Oct 24, the RRR for financial institutions will be slashed by 0.5 percentage points, to further reduce the cost of financing.

Benchmark interest rates will also be cut, to ensure reasonably adequate liquidity in the banking system.

From Oct 24, interest rates for one-year loans and deposits will be cut by 0.25 percentage points to 4.35 percent and 1.5 percent respectively, the PBOC said.

This is the fifth RRR reduction in nearly nine months and the sixth round of interest cuts in nearly 11 months.

“This is necessary to release more liquidity and stabilize market expectations, as September’s producer price index [PPI], which measures wholesale inflation, contracted for the 43th-consecutive month,” said Xu Hongcai, economist with China Center for International Economic Exchanges, a Beijing-based think tank.

China’s consumer price index (CPI) was 1.6 percent higher in September than in the same month last year, down from a 2 percent year-on-year rise in August. The low inflationary level opened room for RRR cuts, Xu said.

During the first three quarters, China’s fixed-asset investment climbed 10.3 percent year on year, 5.8 percentage points slower than the same period last year.

“As the real economy faces tough challenges, the cuts in interest rates and RRR are building a sound monetary environment for stable growth,” said Zeng Gang, researcher at the Chinese Academy of Social Sciences.

The move is meaningful for enterprises as they will reduce financing costs, ease pressure from the economic downturn and improve operating conditions, Zeng said.

Meanwhile, the PBOC announced the RRR for qualified financial institutions supporting small and micro businesses and agriculture will be lowered by another 0.5 percentage points.

The central bank also announced it would remove the upper limit of interest rates’ floating range for deposits in commercial banks and cooperative financial institutions in rural areas, amid efforts to improve the market-oriented formation mechanism of interest rates.

“This means China’s efforts to liberalize interest rates have basically been completed,” said Xu Hongcai.

China’s economy, under the “new normal” of slower growth and higher quality, expanded 6.9 percent in the third quarter of 2015, the first time the quarterly growth rate has dropped below 7 percent since the second quarter of 2009.

As the economy continues to slow and global financial markets fluctuate, these moves aim to establish a sound financial environment for restructuring and steady growth of the economy, the PBOC said in a separate statement after the interest rate announcement.

The PBOC said it would continue with the fine tuning of monetary policies, and implement various tools to provide adequate liquidity and ensure market stability.