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China cuts interest rates as economy slows

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The People’s Bank of China has cut interest rates again in an attempt to stimulate economic growth.

Today’s move marks the sixth time the Chinese central bank has reduced interest rates since November 2014.

Effective from Saturday, the country’s benchmark one-year lending rate will be cut by 0.25 percentage points to 4.35 per cent, from 4.6 per cent in August, while the one-year deposit rate will drop to 1.5 per cent from 1.75 per cent.

The reserve requirement ratio for all banks has also been cut by 50 basis points to 17.5 per cent.

Aviva Investors fund manager of the Asia Pacific equities Xiaoyu Liu says the Chinese government wants to use these policies to “smooth out” the country’s transition from an investment to consumer-driven economy.

He says: “The government has shown that it is aware of the overcapacity problems and understands that investment-led growth cannot continue for ever. But it wants to use these policy tools to smooth out the transition period.

“[The rates cut] is positive news for Chinese equities, particularly companies in the property and utility sectors where there is high financial leverage. In my view, this is neutral to negative for the banks. Although the rate cut will help with non-performing loans, it will narrow their interest rate margin.”

China’s economy grew 6.9 per cent in the third quarter of this year, slightly down on the 7 per cent of the previous quarter. Though a small drop, the current growth rate is the weakest since the global financial crisis.

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