The Chinese government's easing of monetary policies is much more than a response to the recent stock market rout, as it aims mainly to lower borrowing costs and shore up economic growth.
On Tuesday, the People's Bank of China (PBOC), the central bank, announced cuts in the reserve requirement ratio (RRR) and a lowering of interest rates, following a four-day losing streak on the stock market that chopped the benchmark Shanghai index by more than 20 percent.
On Sept. 6, the RRR for financial institutions will be cut by 50 basis points. The RRR for financial leasing companies and companies providing car loans will be lowered by 300 basis points.
From Wednesday, interest rates for one-year lending and deposits will be cut by 25 basis points to 4.6 percent and 1.75 percent respectively.
The measures helped arrest the freefall on the stock market, with the Shanghai index seeing its decline narrow to 1.27 percent on Wednesday, down from a 7.63-percent plunge on Tuesday and 8.49 percent on Monday.
European stock markets mostly surged on Tuesday after turmoil in the global markets on Monday. Major indices in the United States also witnessed narrowing declines on Tuesday compared with previous trading days.
UBS chief economist Wang Tao said the move signaled the Chinese government's determination to safeguard financial stability and helped shore up sentiment in financial markets.
But that was only a small part of the government's intentions, as China still faces huge downward pressure on economic growth.
China is lowering financial costs and maintaining reasonable liquidity to ensure steady growth, said Ma Jun, chief economist at the central bank's research bureau.
"It was necessary to cut RRR and interest rates again to stabilize market expectation both at home and abroad, in a showcase of China's role as a responsible large nation," Ma said.
This is the fourth time the PBOC has cut both RRR and interest rates since the beginning of this year.
