The plunging Chinese stockmarkets, which have wiped out an estimated $US2 trillion in value in the past fortnight have forced China’s central bank cut interest rates and the requirement reserve ratio in an effort to soften the blow of the falls and try and direct more money to business.
The move will be tested later this morning when the Chinese markets re-open for trading.
The cuts were announced late on Saturday evening and applied from yesterday. The central bank explained them as being aimed to “support the real economy and promote restructuring”.
But western economists and analysts said Friday’s rout on Chinese markets – the second in as many weeks – was the driving factor as the cuts came 10 days ahead of the release of June economic data, plus the second quarter GDP report which normally might have prompted cuts later this month.
In fact Chinese shares suffered one of their biggest one-day declines on Friday, on top of the big sell-off the week before.
The Shanghai Composite index lost 7.4% on Friday, wiping out hundreds of billions of dollars off market value. It was the sharpest fall in Shanghai since June 10, 2008.
Shanghai is now 18.8% down from its June 12 high, although it is still up almost 30% for the year so far (although that is eroding by the day).
Bloomberg pointed out this was the biggest two week fall in China since 1996.
The Shenzhen Component Index dived 8.24%, or 1293.66 points, to close at 14,398.79 points. And the ChiNext Index, tracking China’s Nasdaq-style board of growth enterprises, tumbled a record 8.91% on Friday.
Over the week, the Shanghai market lost 6.37% (on top of the 13.3% loss the week before) and the Shenzhen market dropped 8.7%. The ChiNext is down 25% in the past three weeks and the Shenzhen market is off more than 20%.
According to analysts, the losses in market value top $US3 trillion over the past fortnight to last Friday.
It was the fourth time the People’s Bank of China had cut interest rates since last November. And the third cut in the reserve ratio in five months.
The central bank said on its website that the one-year lending rate will be reduced by 25 basis points to 4.85% from yesterday and the one-year deposit rate will fall by 25 basis points to 2%.
The cut in the deposit rate and the slashing or reserve ratios is an attempt to boost lending for investors stricken with paper losses.
Reserve ratios for some lenders will be cut by 50 basis points, showing the problem, the reserve ratio will be slashed by 300 points for finance companies, or non-bank financial institutions, mostly brokers and associated finance companies who have been involved in margin lending in the market.
The government is due to release second-quarter GDP data on July 15 and many economists expect growth to dip below 7%, which would be the weakest performance since the depths of the global financial crisis. In fact a government think tank said it would be 6.9% in a report released on Friday.
China last cut interest rates on May 10 and it last cut the reserve requirement ratio for all commercial banks by 1% on April 19 – the deepest single reduction since the depth of the global financial crisis in 2008 – following an 0.50% cut in February.
The central bank has now cut the lending rate by a total of 115 basis points since last November, as well as a total of 150 basis cut in system-wide reserve requirements.
The cuts will have been signed off on by the government and the powerful state council – they are now very worried about the slowing pace of growth and now the pricking of the stockmarket bubble.
