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China Cuts the Interest Rate for the Third Time in 6 Months

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Third rate cut

The PBOC (People’s Bank of China) cut the benchmark lending rate by 25 bps (basis points) to 5.10%. The bank also lowered the one-year benchmark deposit rates by 25 bps to 2.25%. The reduction would be effective starting May 11.

This is the third interest rate cut by China’s central bank since November 2014. The PBOC lowered rates mainly to counter deflationary pressures, prop up low factory growth, and bolster a cooling property market. Indicators coming out of the economy showed a worse-than-expected slowdown. This led the central bank to this rate cut.

The central bank was quoted as saying, “Currently, the pace of domestic economic restructuring is quickening and the fluctuation of external demand is relatively big. China’s economy is still facing relatively big downward pressure.”

Experts expect many similar easing measures during the rest of the year in order to stimulate demand in the economy.

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Impact on iron ore miners

The country’s iron ore and rebar futures posted strong gains as an immediate result of the Chinese credit easing. Benchmark iron ore prices were up 5.1% to $62.50 per ton on May 11. Cheaper credit usually stimulates demand. More easing and additional stimulus expectations should support prices.

Chinese credit easing and other sustainable measures will positively impact the steel industry. This will help iron ore companies like Rio Tinto (RIO), BHP Billiton (BHP) (BLT), Vale (VALE), and Cliffs Natural Resources (CLF).

It will also affect funds investing in the iShares MSCI Global Metals & Mining Producers ETF (PICK) and the SPDR S&P Metals and Mining ETF (XME). BHP Billiton and Vale account for 22% of PICK’s holdings. Cliffs Natural Resources forms 3.6% of XME’s holdings.

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