The China central bank has decided to cut the deposit reserve ratio for certain qualified financial institutions, effective 28th Jun 2015, with the view of supporting the growth of real economy.

Meanwhile, the China central bank has since 28th June 2015, cut both its benchmark interest rates and the amount of reserves certain banks are required to hold, with the aim of lowering borrowing costs. Notably, the one-year benchmark lending rate has been reduced by a quarter of a percentage point to 4.85% and the one year deposit rate will be lowered by a quarter of a percentage point to 2%

The move to cut interest rates is beyond the market expectation. This is because judging from economic fundamentals, there is no need for such cut.

As far as real economy is concerned, the policy on interest cut and the targeted cuts on the required reserve ratios introduced by the central bank are aiming at lowering its lending rate.

However, the aforementioned "positive effects" are mere theories. The slowdown in the lending in real economy is not due to lack of liquidity, but the ineffective interest rate transmission mechanism.

As far as stock market is concerned, such move by the central market might be able to cushion the fluctuating market, but its positive effect does not seem to be able to fed a run-up in the stock market in the long run.

It is clear that the unexpected policy rate cut by the central bank was aimed at stabilizing the growth of the economy; however, such policy does not seem to have positive impacts on both the real economy and the stock market.