China cuts rates, required reserves in global action

A woman walks in front of the headquarter of China's Central Bank ,the People's Bank of China, in Beijing October 8, 2008.

BEIJING (Reuters) - China cut interest rates and lowered banks' required reserves on Wednesday as part of a coordinated drive by global central banks to halt a free-fall in world financial markets.

It is the first time that the People's Bank of China (PBOC) has announced a change in interest rates at the same time as other central banks.

"It's good news. I think global central banks realized that they have to orchestrate their moves as earlier individual steps didn't give the markets the lift they were looking for," said Li Zhikun, senior economist at China Jianyin Investment Securities in Beijing.

The cost of one-year bank loans will fall from Thursday to 6.93 percent from 7.20 percent, while the benchmark one-year deposit rate will fall to 3.87 percent from 4.14 percent, the central bank said on its website, www.pbc.gov.cn.

China adjusts interest rates in increments that are divisible by nine to make it easier for lenders, which work off a 360-day banking year, to calculate interest, a task that until recently was often done with an abacus.

The central bank also cut the proportion of deposits that banks are required to hold in reserve by half a percentage point as from October 15.

From that date, big banks will have to tie up 17 percent of their deposits at the central bank instead of lending them out. The ratio for other banks falls to 16 percent.

"Stocks across the world are sliding too sharply. This is a much-needed step. It would have been better if it had come a bit earlier," said Gene Ma, chief economist at China Economic Monitor, a Beijing consultancy.

JOINING HANDS

The PBOC gave no reason for the easing, which was announced in conjunction with rate cuts by the central banks of the United States, the euro zone, Britain, Canada, Switzerland and Sweden.

Hong Kong cut its discount rate a full percentage point earlier on Wednesday, while the United Arab Emirates trimmed its benchmark rate by half a point.

Australia's central bank started the ball rolling on Wednesday by slashing its key rate by a surprisingly steep 100 basis points.

It was the second time in less than a month that China has relaxed monetary policy. The central bank cut lending rates and smaller banks' reserve requirements on September 15.

A drop in bill yields earlier in the week, induced by the central bank, had alerted traders to the growing possibility of a rate cut.

In another step aimed at encouraging consumption in the world's fourth-largest economy, state media said China was temporarily scrapping the 5 percent withholding tax levied on interest income.

Beijing last cut the tax rate from 20 percent in August 2007.

China's bourse, like other global markets, has fallen hard this year. The main Shanghai index has lost two-thirds of its value since hitting a record high last October.

Ren Chengde, a senior stock analyst at Galaxy Securities in Shanghai, said he expected shares to rise at least 2 or 3 percent on Thursday.

"But the essential problem that is now depressing the Chinese market comes from overseas, and if foreign markets cannot stabilize, the Chinese market will lose the momentum of a rebound again in the medium term," Ren said.

(Reporting by Eadie Chen, Langi Chiang, Jason Subler and Lu Jianxin; Writing by Alan Wheatley; Editing by Neil Fullick)