China fell back on its major levers to stem the biggest stock market rout since 1996 and a deepening slowdown, cutting interest rates for the fifth time since November and lowering the amount of cash banks must set aside.

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

China's surprise yuan devaluation on Aug. 11 led to a tightening in liquidity as the PBOC subsequently bought its currency to stabilize the exchange rate and curb capital outflows. The yuan may face more downside pressure as a result of the latest monetary easing, making it harder to keep depreciation in check. A 22 percent stock market plunge over four days added pressure for broad stimulus as authorities pull back from other direct efforts to boost equities.

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

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

China's acceleration of monetary easing underscores policy makers' determination to meet Premier Li Keqiang's 2015 growth goal of about 7 percent. The economy's fundamentals haven't changed, Li said in a statement on the government's website, adding there's no basis for the yuan to depreciate continuously, and that China is able to keep the exchange rate basically stable at a reasonable level.

The economy still faces downward pressure, and the task of stabilizing growth, adjusting its structure, pushing reforms, and improving living standards is very challenging, the PBOC said in a Q&A-style statement released after the move. Given volatility in global financial markets, “we need to use monetary policy tools more flexibly,” it said.

Yuan Depreciation

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

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

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

China has halted intervention in the stock market so far this week as policy makers debate the merits of an unprecedented government campaign to prop up share prices, according to people familiar with the situation. Some officials argue that falling stocks will have a limited impact on the world's second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private.

'Changed Tack'

“With the government's efforts to prop up equity prices through direct purchases in tatters, policymakers have changed tack,” said Mark Williams, chief Asia economist at Capital Economics Ltd. in London. “The move may halt the market slide, but we suspect the primary motivation is to shore up confidence in the state of the wider economy.”

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

Before Tuesday's move, central bank Governor Zhou Xiaochuan had already lowered the required reserve ratio twice this year, with an additional move targeted to certain banks. Officials are also acting to boost lending including at the country's policy banks.

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

“It means China's interest rate liberalization is basically completed,” said Yao Wei, a Paris-based China economist at Societe Generale SA. “It also means the real interest rate cut may be smaller” as banks are now largely autonomous in setting both lending and saving rates.

–With assistance from Kevin Hamlin in Beijing.

Instant Insights /

China Falls Back on Rate Cuts

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