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China opts for measured response to days of stock market panic China opts for measured response to days of stock market panic
(about 1 hour later)
Beijing has taken action. After two days of painful stock market falls, the People’s Bank of China (PBoC) has seen enough. Interest rates have been cut to put a floor under share prices and support the real economy.Beijing has taken action. After two days of painful stock market falls, the People’s Bank of China (PBoC) has seen enough. Interest rates have been cut to put a floor under share prices and support the real economy.
The reduction in borrowing costs was modest but significant. The one-year lending rate went down by a quarter point to 4.6%. The reserve requirement ratio (RRR), which determines how much banks can lend to the economy, has been cut by half a percentage point.The reduction in borrowing costs was modest but significant. The one-year lending rate went down by a quarter point to 4.6%. The reserve requirement ratio (RRR), which determines how much banks can lend to the economy, has been cut by half a percentage point.
Related: Stock markets surge after China cuts interest rates - live updatesRelated: Stock markets surge after China cuts interest rates - live updates
Beijing had the scope to do more to boost confidence after the turmoil of recent days, but has opted for a more measured approach at this stage.Beijing had the scope to do more to boost confidence after the turmoil of recent days, but has opted for a more measured approach at this stage.
There are reasons for this. Capital has been leaving China at a rapid rate in recent weeks, and a big reduction in interest rates would have provided extra encouragement for investors to take their money elsewhere.There are reasons for this. Capital has been leaving China at a rapid rate in recent weeks, and a big reduction in interest rates would have provided extra encouragement for investors to take their money elsewhere.
The official line up until now has been that the Chinese economy is slowing in line with expectations rather than in the early stages of a full-blown recession. Slashing interest rates would have been seen as evidence that the economy was indeed suffering a hard landing and might have further damaged confidence.The official line up until now has been that the Chinese economy is slowing in line with expectations rather than in the early stages of a full-blown recession. Slashing interest rates would have been seen as evidence that the economy was indeed suffering a hard landing and might have further damaged confidence.
China wants to keep some of its powder dry. The statement issued by the PBoC, which talked about the downward pressure on the economy and the need to have more flexible policy tools to cope with the stock market blowout, reflects how concerned policymakers are about recent events.China wants to keep some of its powder dry. The statement issued by the PBoC, which talked about the downward pressure on the economy and the need to have more flexible policy tools to cope with the stock market blowout, reflects how concerned policymakers are about recent events.
Having decided not to act over the weekend, when many analysts had been braced for interest rates and reserve requirements to be cut, the PBoC timed its move well.Having decided not to act over the weekend, when many analysts had been braced for interest rates and reserve requirements to be cut, the PBoC timed its move well.
Related: China seeks to reassure stock markets with rate cut and looser lending
Bourses in Europe all bounced despite the overnight drop in shares on the Shanghai stock exchange, and Wall Street is also on course to open higher. Intervention is at its most effective when markets have just turned, because central banks can encourage bargain hunters and hurt investors who have “shorted” the market by selling shares they do not actually hold in the hope of buying them later at a lower cost.Bourses in Europe all bounced despite the overnight drop in shares on the Shanghai stock exchange, and Wall Street is also on course to open higher. Intervention is at its most effective when markets have just turned, because central banks can encourage bargain hunters and hurt investors who have “shorted” the market by selling shares they do not actually hold in the hope of buying them later at a lower cost.
One thing the action lacked was the element of surprise. It was inevitable that there would be a response to a share price fall that has wiped out all the gains in the stock market seen this year. Even so, the PBoC will be pleased by the initial market response, with shares in London, Frankfurt and Paris all well on the way to wiping out Monday’s losses.One thing the action lacked was the element of surprise. It was inevitable that there would be a response to a share price fall that has wiped out all the gains in the stock market seen this year. Even so, the PBoC will be pleased by the initial market response, with shares in London, Frankfurt and Paris all well on the way to wiping out Monday’s losses.