Monetary easing to bolster economy, restore confidence

This is the fourth time the PBOC has cut both RRR and interest rates since the beginning of this year.

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.

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