Xinhua Insight: Forceful easing to keep Chinese economy buoyant

The decision to simultaneously cut China's interest rates and reserve requirements for banks is a "forceful easing move" that could stabilize the market and shore up growth.

The last time the central bank made such a concerted easing effort was back in late 2008 at the height of the global financial crisis.

The People's Bank of China (PBOC) announced Saturday that one-year lending and deposit rates would be cut by 25 basis points (bps) to 4.85 percent and 2 percent respectively.

The reserve requirement ratio (RRR), the amount of cash banks are required to hold, has been cut by 50 bps for commercial banks serving rural areas, agriculture and small businesses. The RRR for finance companies, or non-bank financial institutions, is lowered by 300 bps from Sunday, to "support the real economy and promote restructuring" according to the PBOC.

ECONOMIC RECOVERY NEEDS CONSOLIDATION

It is the third RRR cut in five months, and the fourth round of interest rate cuts in seven months.

"The combined action is a forceful move, sending a clear signal to the market that authorities are actively responding to the financial situation," said Zeng Gang of the Chinese Academy of Social Sciences.

China faces a tough task to stabilize growth and needs to continue to use the monetary policy flexibly to lower borrowing costs and boost the economy through restructuring, the PBOC said in a press release.

The double cut could consolidate the recent economic recovery, which is still fraught with uncertainties, said Lian Ping, chief economist at the Bank of Communications, citing a slight rebound in real-estate investment and brisk housing sales in May.

"Economic drivers are still relatively weak and more liquidity through policy easing is necessary. Market sentiment may improve, which is important for the economy, in the second half of the year," said Wang Jun, a researcher at China Center for International Economic Exchanges.

China will release its Q2 GDP figure on July 15.

GOOD FOR SMALL BUSINESSES

The purpose of the RRR cut is to support farmers, rural and agricultural development and small businesses, the PBOC said.

"Liquidity for Chinese banks is plentiful given their excessive reserves. Reserves of cash over the required amounts are roughly at 3 trillion yuan (490 billion U.S. dollars)," said Yao Yudong, director for the PBOC's finance research institute.

Cutting the RRR and the benchmark interest rates will make monetary policy adjustment more targeted and effective in supporting the real economy, according to Yao.

Despite the drumroll of RRR and rate cuts, borrowing costs for small enterprises remain stubbornly high as risk-averse banks remain reluctant to lend them money.

The Chinese government is encouraging mass entrepreneurship and innovation, most of which will inevitably come from smaller businesses, believing they can inject more vitality to a sputtering economy that has be spoiled by state-led investment for years.

MANNA FROM HEAVEN FOR THE STOCK MARKET

The latest easing may forestall further sell-off of the Chinese stock market next week, which teeters on the brink of systemic financial woes.

The stock market has been through a nightmarish two weeks following moves to cool debt-fuelled rallies and investors' concerns about bubbles.

The benchmark Shanghai Composite Index has slumped 18.8 percent from a peak of 5,178.19 points on June 12. A total of 12.1 trillion yuan in market capitalization on the Shanghai and Shenzhen bourses was wiped out.

Pessimism shrouded the market before the cuts. Most analysts consider a decline of 20 percent from the recent peak means the advent of a bear market.

The stock market has staged an impressive rebound since the second half of last year, a phenomenon generally considered an opportunity for big state-owned enterprises to pay off debts and small businesses to access much needed capital support. However, worries have grown increasingly acute on consensus that soaring stock prices pushed up by a frenzy of speculation are unsustainable. Endi