View of the headquarters and head office of the People's Bank of China (PBOC), China's central bank, in Beijing, April 3, 2015. [Photo / IC]

Move will combat downside risk in face of slowing growth and capital outflows

China's central bank announced that it would lower the benchmark deposit and lending rates by 25 basis points beginning on Wednesday, hoping to further ease companies' debt burdens and curb expanding downward risks.

After the adjustment, the one-year deposit rate for financial institutions fell to 1.75 percent, and the lending rate dropped to a record low of 4.6 percent, according to the People's Bank of China.

It was the fifth drop in interest rates since November. The last one, also by 25 basis points, was on June 28.

The central bank also cut the amount of money banks must hold, or the reserve requirement ratio, by 50 basis points for all financial institutions, starting on Wednesday, to ensure sufficient liquidity in the banking sector and keep a stable growth in credit.

The measure is to offset capital outflows, which have increased since the third quarter, according to economists.

Ma Jun, chief economist of the central bank's research bureau, said the cut in interest rates and the reserve ratio will help to stabilize expectations, but it doesn't change the "prudent" monetary policy.

Liang Hong, chief economist at China International Capital Corp, said that intensified deflationary pressure was the main factor behind the rate cuts. "Even after the cuts, China's interest rate is still higher than those of the world's major economies," said Liang, who believes recent low inflation provides more room for policy fine-tuning.

The weaker-than-expected economic indicators since July showed that the country's economic growth momentum has resumed its downtrend after a short-term rebound in May and June.

Chinese stocks continued their turbulence on Tuesday, with the benchmark Shanghai Composite index sinking a further 7.6 percent to below the 3,000 level. It slumped 8.5 percent on Monday.

In order to support agricultural activities and small businesses, the central bank allowed an extra 50 basis points reserve ratio cut for rural financial institutions, including the non-county level rural commercial banks and rural credit cooperatives.

Moreover, the ratio cut for financial lease companies and auto financing companies reached 3.5 percentage points, according to the central bank.

Mark Haefele, global chief investment officer at UBS AG, said, "We still believe that the Chinese authorities will succeed in averting an economic hard landing."

The central bank simultaneously removed the interest rate ceiling for deposits longer than one year, which had been limited to 1.5 times the benchmark rate, while deposits with maturities of less than one year will maintain the limit.

"It means the reform to liberalize interest rates has almost finished," said CIC economist Liang. "The rates will be determined more by the market in the future."