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July 6, 2012

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China cuts interest rates for 2nd time in a month

China cut interest rates for the second time in a month yesterday and allowed banks to set lower lending rates to bolster economic growth.

Economists said the cut may bring more liquidity to the market, but that the authorities would need to take more measures to control prices in the property market.

From today, the benchmark one-year deposit rate will be lowered by 0.25 percentage points to 3 percent, the People's Bank of China said in a statement.

Banks have been allowed to raise deposit rates by as much as 10 percent above the benchmark after China cut interest rates in June for the first time since 2008.

The one-year lending rate will fall by 0.31 percentage points to 6 percent, and banks are allowed to offer a 30 percent discount, compared to the previous 20 percent.

The cuts come after data showed China's manufacturing industry in June was expanding at its slowest pace in seven months. They also come just days ahead of the release of other major economic data for June and China's gross domestic product growth in the second quarter, arousing concerns of an economic downturn more severe than expected.

Lower than expected

"Cutting interest rates twice in a month indicates that the growth of GDP in the second quarter may be lower than authorities' expectations," said Lu Zhengwei, chief economist at China Industrial Bank. "We expect the growth to be 7.6 percent year-on-year."

He said it would take time for the policy to take effect, and China should further ease capital regulations that limit banks' abilities to offer loans.

Since March, China has rolled out a series of stimulus measures, including lowering the reserve requirement for banks and lifting investment on manufacturing industries, after the country's growth slowed to a nearly three-year low of 8.1 percent in the first quarter.

"The rate cuts came a little bit earlier than what the market expected," Li Huiyong, chief macroeconomic analyst for Shenyin and Wanguo Securities, told Xinhua news agency. "I think a declining inflation level gives more room for lowering the interest rates and it reflects that economic growth is not looking that good in the second quarter."

Efforts elsewhere

Yesterday's cut also came amidst efforts elsewhere to boost the global economy.

The Bank of England raised its asset-purchase target by 50 billion pounds (US$78 billion) to 375 billion pounds, and the European Central Bank cut its benchmark interest rates by 0.25 percentage points.

China's central bank called on banks to control mortgage lending. That suggested authorities worry about a resurgence in real estate speculation.

The central bank said the maximum interest rate discount on individual mortgage loans would be unchanged at 30 percent, and financial institutions should continue to apply "differentiated credit policies" to tame property speculation.

"The goal of the continuous interest rate cuts was to maintain economic growth, but the authorities may find it difficult to monitor capital flow when liquidity improved," said Yang Hongxu, an analyst with E-House China Research and Development Institute.

"Some of the funds will definitely be flowing into the property market as the property market already shows signs of recovery."

Yang said that it could be difficult to tame housing prices if there were no new measures taken to hedge the effects.




 

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