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June 8, 2012

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China cuts interest rates for 1st time since 2008

China has cut borrowing costs for the first time since 2008 and loosened controls on banks' lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe's debt crisis threatens global growth.

From today, the benchmark one-year lending rate will fall by a quarter of a percentage point to 6.31 percent, the People's Bank of China said. The one-year deposit rate will fall by the same amount to 3.25 percent.

But the central bank has loosened its grip on interest rates by allowing banks to set their own deposit rate by as much as 1.1 times the benchmark. It is also allowing banks to set lending rates by as low as 80 percent of the benchmark, 10 percentage points lower than previously.

Wang Tao, chief China economist at UBS in Hong Kong, who previously worked at the International Monetary Fund, described the deposit-ceiling move as "unprecedented" and a "milestone for interest-rate liberalization," according to Bloomberg News.

For savers, the new rate means interest on a 5,000 yuan one-year deposit could shrink by 12.50 yuan if banks set the deposit rate according to the benchmark.

Mortgage payers, on the other hand, could pay 150 yuan less each month for a 20-year, 1 million yuan (US$158,000) mortgage.

The cuts follow a series of measures to stimulate the economy after growth fell to a nearly three-year low of 8.1 percent in the first quarter and April factory output grew at its slowest rate since the 2008 crisis.

Among measures in recent weeks, China announced 66 billion yuan in spending on building affordable housing and 26.5 billion yuan to subsidize sales of energy-efficient appliances. It has also approved a wave of major investments by state companies.

"The changes indicate mounting concern in Beijing over slowdown of growth," said Credit Agricole CIB economist Dariusz Kowalczyk, the Associated Press reported.

"The biggest impact of the move is likely to be on sentiment, both among businesses and consumers domestically" by showing China is "bringing out the big guns to support growth," Kowalczyk said. "They are acting early enough and investors know that they have more ammunition if need be and a good track record in using it."

Economists said the timing was surprising, and may indicate that major economic indicators for May, due to be released this weekend, will be below expectation.

Li Wei, an economist at Standard Chartered Bank, said: "Most people were expecting more reserve requirement cuts before moves to cut interest rates. Nevertheless, this is the central bank boosting monetary policy supports to prop up economic growth."

He said inflation in May might cool to 3.1 percent from 3.4 percent in April, while other data, including growth of industrial production and fixed-asset investment, may be disappointing.

Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd, told Bloomberg: "This will be the beginning of a rate cut cycle and there will be at least one more reduction this year. The data to be released over the weekend must be very weak."




 

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