November 21, 2014 / 2:25 PM / 5 years ago

HIGHLIGHTS-China explains its first rate cut in over two years

BEIJING, Nov 21 (Reuters) - China cut interest rates for the first time in over two years on Friday to spur an economy that is sliding to its slowest growth in 24 years, but signalled that financial reforms were still on the cards by further freeing up the rates market.

Below are excerpts from a separate question and answer statement published by the People’s Bank of China to explain why it cut interest rates and lifted the ceiling for deposit rates.

WHICH PROBLEMS WERE THE POLICY CHANGES ADDRESSING?

The problem of difficult financing, costly financing, remains glaring in the real economy.

To solve the problem of expensive financing for companies, especially small companies, is ... meaningful for stabilising economic growth, promoting employment and benefiting people’s livelihoods.

DOES THE RATE ADJUSTMENT MEAN THAT MONETARY POLICY HAS CHANGED?

The rate adjustment was a neutral operation and did not mean that monetary policy has changed.

Currently, our economic activity is within a reasonable range, and overall inflation is in a downtrend.

Based on the trend in economic fundamentals, the central bank needs to make flexible use of interest rate instruments to conduct fine-tuning.

WHAT WERE THE NEW INITIATIVES IN THE COMBINATION OF RATE CUT AND REFORMS?

The reduction in the lending rate was bigger than that for the deposit rate, which is an improvement from traditional rate adjustments, and reflects a more targeted approach to guiding market interest rates and social financing costs lower.

The combination of a small reduction in deposit rates and the expansion in its floating range is beneficial for keeping real rates at an appropriate level.

If commercial banks make full use of the floating range, the rise in the new floating deposit rate would correspond to that before the rate adjustment.

The different types of maturities for benchmark lending and deposit rates were merged or simplified this time.

Fixed benchmark five-year deposit rates are no longer announced. Maturities for benchmark lending rates were simplified and combined into three types: within a year, one to five years and over years.

This would expand the scope for independent pricing by financial institutions.

WHAT IS THE NEXT STEP TO PROMOTE REFORMS IN THE INTEREST RATE MARKET?

We will continue to promote liberalisation of the interest rate market via promoting negotiable certificates of deposits with companies and individuals. Reporting by Koh Gui Qing; Editing by Mike Collett-White

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