China market slump Central bank cuts interest rates

China's central bank cut its main interest rate by 0.25 percentage points to 4.6 per cent today (August 25th) in a bid to calm stock markets after shares tumbled for two consecutive days.

The Shanghai Composite Index fell 7.6 per cent today, after losing 8.5 per cent yesterday, after data revealed manufacturing activity dropped to its lowest level since 2009 and exports fell by 8.3 per cent in July.

The fifth interest rate cut since November

The interest rate cut – which will take effect tomorrow – is the fifth one since November and the latest effort from Beijing to stabilise markets, after suffering quasi-continued losses since June that wiped out more than £1.5 trillion.

On Sunday, it announced it plans to let its main state pension fund invest in the stock market for the first time.

The China Securities Regulatory Commission has also banned investors holding more than five per cent of a company's shares from selling any of their holdings for the next six months.

Today's move has boosted global share prices further, with Wall Street's Dow Jones index opening more than 1.7 per cent higher and London's FTSE 100 rising almost three per cent.

Reducing the "social cost of financing"

The People's Bank of China said that the interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy".

It said it also acted to increase the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.

"China’s economy will get worse before it gets better," Yu Yongding, a Chinese economist, told the Wall Street Journal.

He said Chinese companies are struggling with high debt loads and low prices. "China has entered a stage of deflation. To maintain economic stability in the short run, it’s inevitable for the Chinese central bank to ease credit," he added.