FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 05 July 2015

China Cuts Both Interest Rate and RRR to Save the Stock Market

Written by , GEI Associate

The People's Bank of China (PBOC) has taken a rare easing step, cutting the benchmark lending rate by 25 basis points to 4.85%, and lowering the reserve requirement ratio (RRR) for some lenders including city commercial and rural commercial banks by 50 basis points. The last time it did so was at the height of the global financial crisis, in October 2008.

According to PBOC, the policy easing this time is used in order to lower borrowing costs and boost economy. However, as the previous rate cut shows, the easing would have a limited impact on the overall economy. Due to the cooling inflation and banks' reluctance to lend amid concerns over collateral and risk, the real cost of borrowing in China would still remain high.

Rather, as most analysts agree, the fact that the easing follows the biggest one-day decline in several years suggests that the action is taken to inject confidence in the stock market. On Friday, June 26, the Shanghai Composite Index fell 7.4% and was off 19% since hitting a 52-week high on June 12; Shenzhen's benchmark index has also fallen more than 20% from a June 12 high, pushing it into bear-market territory. Recent warnings from regulators about borrowing too much money to buy shares, as well as the efforts to cut the level of margin lending in the system, are two key reasons for the pull back.

The market plunge threatens to undermine recent progress on restoring growth momentum. It could also undermine the credibility of previous official statements that the government should focus on structural reforms. In response, Beijing took the rate cut as a signal to avoid panic in the financial market and to boost confidence, which plays an important role in the Chinese economy.

Moreover, the growth of the stock market is also important to Beijing as a tool for financial reform. In the case of debt-burdened state-owned companies, higher stock prices can help them to repair their balance sheets by increasing the relative value of firms' assets. Companies can subsequently selling stakes or issuing new shares, using the cash to pay down their substantial borrowings. Consequently, as these state-owned enterprises expand their capital, it becomes much easier to carry out mergers of them, making them more competitive.

On the other hand, the growth of the market can also reduce the economy's reliance on bank lending, especially of the private entrepreneurs. The stock market can crate a financing channel for companies that are denied access to bank lending.

There are also other positive influences of stock market boom such as spurring demand and reducing capital outflows due to the sharp drop in property prices. Therefore, as Chinese stocks still plunge, Beijing is likely to use other measures to save the stock market.

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Was Marx Right?
Angst in America, Part 5: The Crisis We Can’t Muddle Through
News Blog
Ancestors Of Flores 'Hobbits' May Have Been Pioneers Of First 'Human' Migration Out Of Africa
The Global Top 10 Android Apps
What We Read Today 29 April 2017
'Horrifying' Witnesses Describe Latest String Of Prisoner Executions In Arkansas
Apr 25, 2017 08:01 GMT What Trump's Next 100 Days Will Look Like
How Did Small Businesses Do In 2016?
Costs Of Building A 355-Ship US Navy
The Roots Of Rising Treasury Yields
How Will College Grads Do In 2017 In Their Job Search
Recall This Bond Trader Chart? Here's What Happened
Infographic Of The Day: The Sad State Of America's Infrastructure In One Infographic
Early Headlines: High Worker Taxes, US Has Temp Funding, Net Neutrality Going?, Kurds Supported Erdogan, US To Crack Down On Iran, Russia C. Bank Easing, India Heat, H1B Scam, And More
Wiping Out Jobs Growth With Robotics
Investing Blog
More People Have Access To Netflix Than A DVR
The Last Time
Opinion Blog
New 'Gaullism' Rises In France
Blockchain: A Technology Whose Time Has Come
Precious Metals Blog
A New Age For Gold
Live Markets
28Apr2017 Market Close: Wall Street Closed Mostly Down On News The U.S. Economy Grew At Its Weakest Pace In Three Years, WTI Crude Settles In The Low 49 Handle
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved