Amid a worsening financial crisis in the US and falling inflation at home, mainland China took a U-turn in its monetary policy by cutting banks' lending rates by 0.09 to 0.36 percentage point on 16 September, the first time since 2004 when interest rates started to rise. It also reduced the required reserve ratio (RRR) of smaller banks to 16.5% from 17.5%, effective 25 September.
The authorities also scrapped the 0.1% stamp duty on the purchase of equities, bought shares in major state commercial banks and encouraged state enterprises to buy back shares from the market, in a bid to stabilise the stock market which had fallen by two-thirds from its peak in October 2007.
But the relatively mild cut of lending rates and the restricted reduction of RRR mean that their impact on the economy is moderate at most. With inflation falling and domestic and external demand slowing under the weight of the global financial crisis, further monetary loosening can be expected. One-year lending rates could be cut to 5.6% by the end of next year from 7.2% at present, while RRR could fall to 12% from 16.5% in the same period.
In a surprising move, the People's Bank of China, China's central bank, cut banks' lending rates on 16 September by 0.09 to 0.36 percentage point but kept deposit rates unchanged. Simultaneously, it reduced the required reserve ratio (RRR) of small and medium-sized banks to 16.5% from 17.5%, effective 25 September. The move was significant in that it signaled a U-turn in the authorities' tightening monetary policy which had been in place since 2004.
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