PBOC intervenes with another China Rate cut

25 August, AtoZForex.com, Lagos – There has been a fall back from China on its major lever to stem the biggest stock market rout since 1996 and an intense slowdown, slashing the interest rates for the fifth time since November and having the amount of cash banks must set apart reduced.

There will be a drop in the one year lending rate by 25 basis points to 4.6 percent with effect from Wednesday, as announced by the People’s Bank of China on its site on Tuesday, stating that “while the one year deposit rate will fall a quarter of a percentage point to 1.75 percent. There will be a lowering of the required reserve ratio by 50 basis points for all banks so as to have funding gaps covered”.

The August 11 surprise devaluation by China of the Yuan led to a tightening in liquidity as the PBOC subsequently had its currency bought. In order to stabilize the rate of exchange and also have capital outflow curbed. The Yuan may face more downside pressure due to the recent monetary easing, making it more difficult to keep depreciation in check.

Pressure continues to pile on the economy as the task of stabilizing growths, structural adjustment, as having the standards of living improved remains a challenge. Lu Ting, Chief economist at Huatai Securities Co, said: “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. 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”.

China has now halted  intervention in the stock market this week as policy makers debate the advantages of an unprecedented government campaign to shore up share prices, according to people familiar with the situation.

Mark Williams, chief Asia economist at capital economics Ltd. In London said: “With the government’s effort to shore up equity prices through direct purchases in tatters, policy makers have changed track. The move may halt the market slide, but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”

The surprise Yuan devaluation earlier this month has resulted in tightening in liquidity as the PBOC subsequently brought its currency to stabilize the exchange rate and curb capital outflows. The newest monetary policy depicts another China Rate cut, which will weigh on the Yuan.

Most likely resulting in more downside, making it harder to keep depreciation in check. A 22 percent stock market plunge over four days added pressure for broad stimulus as authorities pull back from other direct efforts to boost equities.

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