China fell back on its major levers to stem the biggest stockmarket rout since 1996 and a deepening slowdown, cutting interestrates for the fifth time since November and lowering the amount ofcash banks must set aside.

The one-year lending rate will drop by 25 basis points, to 4.6percent, effective Wednesday, the Beijing-based People's Bank ofChina (PBOC) said on its website Tuesday, while the one-yeardeposit rate will fall a quarter of a percentage point to 1.75percent. The required reserve ratio will be lowered by 50 basispoints for all banks to cover funding gaps, it said.

China's surprise yuan devaluation on Aug. 11 led to atightening in liquidity as the PBOC subsequently bought itscurrency to stabilize the exchange rate and curb capital outflows.The yuan may face more downside pressure as a result of the latestmonetary easing, making it harder to keep depreciation in check. A22 percent stock market plunge over four days added pressure forbroad stimulus as authorities pull back from other direct effortsto boost equities.

“The government has stopped using unconventional intervention inthe stock market and decided to use more traditional and moremarket-based methods to boost market momentum and help the realeconomy,” said Lu Ting, chief economist at Huatai Securities Co.“Beijing has released some positive signals, and these will helpglobal stock markets. Using monetary easing to drive stocks and theeconomy is a method more acceptable to international capitalmarkets.”

European shares clawed back some losses following their biggestdecline since the 2008 financial crisis and futures signaled U.S.equities will rally after entering a correction. Russia's ruble leda rebound in developing-nation currencies as raw-material pricesadvanced from the lowest level since 1999. Chinese stock-indexfutures surged.

China's acceleration of monetary easing underscores policymakers' determination to meet Premier Li Keqiang's 2015 growth goalof about 7 percent. The economy's fundamentals haven't changed, Lisaid in a statement on the government's website, adding there's nobasis for the yuan to depreciate continuously, and that China isable to keep the exchange rate basically stable at a reasonablelevel.

The economy still faces downward pressure, and the task ofstabilizing growth, adjusting its structure, pushing reforms, andimproving living standards is very challenging, the PBOC said in aQ&A-style statement released after the move. Given volatilityin global financial markets, “we need to use monetary policy toolsmore flexibly,” it said.

Yuan Depreciation

The PBOC on Aug. 11 said it will allow markets greater say insetting the currency's level, which spurred the biggest devaluationin two decades and threatens to trigger an outflow of capital. ThePBOC has since intervened to stem losses.

Global markets plunged after the depreciation, with emerging-market currencies and commodities among the worsthit.

“A month ago, such measures and others to calm the panic inChinese equity markets triggered a wave of hysteria outside ofChina, that China was intervening in the equity market,” saidKenneth Courtis, former Asia vice chairman at Goldman Sachs GroupInc. and now chairman of Starfort Holdings. “In the last few days,the very same critics of China were screaming for the Chinesegovernment to intervene in the equity market. Two weights, twomeasures.”

China has halted intervention in the stock market so far thisweek as policy makers debate the merits of an unprecedentedgovernment campaign to prop up share prices, according to peoplefamiliar with the situation. Some officials argue that fallingstocks will have a limited impact on the world's second-largesteconomy and that the costs of supporting the market are too high,said one of the people, who asked not to be identified because thedeliberations are private.

'Changed Tack'

“With the government's efforts to prop up equity prices throughdirect purchases in tatters, policymakers have changed tack,” saidMark Williams, chief Asia economist at Capital Economics Ltd. inLondon. “The move may halt the market slide, but we suspect theprimary motivation is to shore up confidence in the state of thewider economy.”

Deflation risks, overcapacity, and a debt overhang remain cloudsover an economy forecast for its slowest expansion since 1990.Industrial production, investment, and retail data all trailedanalysts' estimates in July.

Before Tuesday's move, central bank Governor Zhou Xiaochuan hadalready lowered the required reserve ratio twice this year, with anadditional move targeted to certain banks. Officials are alsoacting to boost lending including at the country's policybanks.

In another step to liberalize interest rates, China will now letbanks set rates freely on deposits with terms longer than a year.For short-term deposits less than a year, banks are limited tooffering as much as 150 percent of the benchmark rate.

“It means China's interest rate liberalization is basicallycompleted,” said Yao Wei, a Paris-based China economist at SocieteGenerale SA. “It also means the real interest rate cut may besmaller” as banks are now largely autonomous in setting bothlending and saving rates.

–With assistance from Kevin Hamlin in Beijing.

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