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China cuts interest rates, reserve requirement ratio to spur growth
2008/11/27

China's central bank has decided to slash the lending and deposit rates by a bigger-than-expected 1.08 percentage points as of Thursday in the latest strong effort to stimulate the economy.

The People's Bank of China (PBOC) said on Wednesday it would cut the benchmark one-year yuan lending rate to 5.58 percent from 6.66 percent and the one-year yuan deposit rate to 2.52 percent from 3.60 percent.

The monetary easing is aimed at "ensuring ample liquidity in the banking system and promoting stable credit growth to make the monetary policy play an active role in supporting economic growth", the PBOC said in a statement.

ANOTHER STRONG EFFORT

A rate cut was expected, but the size and timing was beyond expectation, said She Minhua, a China Securities analyst. The market was expecting a 0.54-percentage-point cut and the central bank usually cuts rates over the weekend.

"By moving ahead of market expectation, the latest moves by the PBOC seemed to be aiming at achieving the maximum effect in boosting market confidence," Tao Wang, UBS Securities economist in Beijing, said in an emailed statement.

The cut was substantially larger than the earlier three cuts, 0.27 percentage points each, since mid September. It also was the largest cut since October 1997 when the PBOC slashed the one-year borrowing cost by 1.44 percentage points to support growth to withstand the Asian financial crisis.

It was the third time the PBOC has cut the deposit rate since early October and the largest cut since June 1999.

The move followed the 4 trillion yuan (584 billion U.S. dollars) stimulus package unveiled on Nov. 9 and also other measures to bolster growth, including increases in export tax rebates and reduction in value-added tax.

The PBOC also said that as of Dec. 5, it would lower the reserve requirement ratio by 1 percentage point at the large banks and by 2 percentage points at the smaller and medium-sized banks.

The large lenders include Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Postal Savings Bank of China.

FOCUS ON GROWTH

The unusual measures showed top officials have a more pessimistic view about the economic outlook, China Securities' She said.

The World Bank on Tuesday cut its 2009 forecast for China's economic growth to 7.5 percent, from 9.2 percent in June. With the financial crisis spreading, the impact on China is expected to intensify amid a global credit squeeze and a slowdown in export growth in 2009, the bank said in its China Quarterly Update.

Faltering growth in exports and property investment has hit China's economy hard. The gross domestic product expanded 9 percent annually in the third quarter, down from 10.4 percent in the first half and 11.9 percent last year.

October's economic data released mid month showed the economy would see further slowdown. The annual industrial output grew 8.2 percent last month, the slowest pace in seven years.

The strong move highlighted the government's determination to meet challenges and promote economic growth, Li Yang, head of the Institute of Finance and Banking at the Chinese Academy of Social Science, told Xinhua.

The latest government action demonstrated once again that the government is using, and will continue to use, all policy actions to keep growth from falling too sharply, said UBS Securities' Wang.

But Zhang Linchang, a Guotai Junan Securities analyst, said it will take time for the easing measures to take effect as money multiplier fell in the economic slowdown.

MORE IN PIPELINE

The retreat in consumer inflation, which eased to a 17-month-low of 4 percent in October, allows the government to focus on sustaining economic growth.

The government announced on Nov. 9 that it would adopt "active" fiscal and "moderately loose" monetary policies, a transition from earlier "prudent" fiscal and "tight" monetary policies aimed at curbing inflation and averting economic overheating.

"Real interest rates measured against inflation expectation is now significantly positive," said Wang. "Month-on-month CPI inflation has already turned negative and China would be facing deflationary pressure in the coming months."

The PBOC has room to cut rates further in the coming months, and the one-year deposit rate could go down to 1.98 percent by the end of June next year, Wang said.

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