RATE CUTS TO LOWER COSTS
The rate cut is seen as the latest effort by the central bank to lower corporate funding costs and shore up the economy, after recent weaker-than-expected economic indicators disappointed global investors.
A main gauge of factory activity, the Caixin flash China general manufacturing PMI slipped to 47.1 in August, the lowest reading since March 2009, while the year-on-year growth in industrial output slowed to 6 percent in July, also down from a month earlier.
Zhu Haibin, chief economist for J.P. Morgan China, said the PBOC's rate cut reassured the market amid growing concerns about the economy.
Wang also recognized the necessity of the move.
"Although financing costs have retreated somewhat, real interest rates have stayed high amid ongoing deflationary pressures, especially the contraction in the PPI," she said.
The producer price index (PPI), a measure of costs for goods at the factory gate, fell 5.4 percent year on year in July, the 41st straight month of decline.
Wang expects the PBOC to cut the benchmark rate once more late this year to further reduce real financing costs.
China's economy grew in the first half of the year by 7 percent, its lowest level since the global financial crisis. But analysts said the growth rate is likely to pick up based on support policies during the rest of the year.
RRR CUT TO STABILIZE ECONOMY
The RRR cut came amid strong market expectations of easing measures by the central bank to lessen the liquidity strain caused by shrinking funds outstanding for foreign exchange and the depreciation of Chinese currency the yuan.
Analysts believe the cut will effectively replenish the market and relieve cash-starved financial institutions.
Wang estimated around 700 billion yuan (nearly 109 billion U.S. dollars) of liquidity will be released immediately.
Giving out a similar projection, Lian Ping, economist with the Bank of Communications, wrote in a research note that the cut in deposit reserve ratio will prompt banks to expand credit and enhance their capacity to support the real economy.
The effects of the cut were instant and evident. On Wednesday, the benchmark overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one other, retreated to 1.786 percent from Tuesday's 1.879 percent.
"The RRR cut, therefore, is necessary to keep base money supply stable, and to ensure a steady growth of money and credit in the coming months," Wang said.
The money market has been suffering from lack of liquidity since the end of July despite repeated cash injections by the PBOC through less powerful operations including reverse repurchase agreements and short-term lending facilities.
Economists predict more easing measures from the central bank in the latter half of the year.
