China cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world’s second-largest economy, sending global shares, oil and metals prices higher.

The one-year lending rate was reduced by 0.4 percentage point to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent, effective tomorrow, the People’s Bank of China said on itswebsite today.

The reduction puts China on the side of the European Central Bank and Bank of Japan in deploying fresh stimulus and contrasts with the Federal Reserve, which has stopped its quantitative easing program. Until today, the PBOC had focused on selective monetary easing and liquidity injections as China heads for its slowest full-year growth since 1990.

“Targeted relaxation wasn’t strong enough to boost the real economy so now they realized they have to relax policy overall,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who formerly worked for the World Bank. “The economic reason for the rate cut is very strong.”

The cut in deposit rates was accompanied by a further step in the nation’s liberalization of interest rates. The cap on what banks can pay customers on their deposits was raised to 120 percent of the benchmark from 110 percent. That would leave savers with unchanged returns at banks that raise rates to the new ceiling from the former cap.

That may help banks retain deposits amid competition from shadow banks and so-called wealth management products while protecting savers’ returns and squeezing bank profits.

David Fuller's view

Is China the greatest risk or the biggest hope, in terms of global economic stability?  

Whatever your view, China is the world’s biggest country and increasingly influential, and this is very unlikely to change. I also think it is one of the most interesting stock markets, and relatively cheap.

China’s Shanghai A-Shares Index continues to benefit from gradual stimulus and closed at its highest level in three years.  This pattern continues to show bull market potential, following a late start.  Hong Kong’s Hang Seng Index has struggled to regain its upward bias since the Democracy protests commenced in September, but it remains inexpensive with a p/e of 10.13 and yield of 3.83%.  Consequently, I would continue to give the upside the benefit of the doubt, provided it remains above the October low, near 22,500.