October 29, 2008 / 11:53 AM / 9 years ago

UPDATE 2-China cuts interest rates again as outlook darkens

(Adds further reaction, background)

By Eadie Chen and Jason Subler

BEIJING, Oct 29 (Reuters) - China cut interest rates on Wednesday for the third time in six weeks to help the world’s fourth-largest economy ride out the reverberations of the global financial crisis.

The People’s Bank of China (PBOC) said the benchmark rate for one-year loans by commercial banks will fall by 0.27 percentage point to 6.66 percent, while the rate on one-year certificates of deposit will drop to 3.60 percent from 3.87 percent.

“Growth is slowing down and policy makers want to take more action to contain the downside risks and to support sentiment in the market,” said Yiping Huang, chief Asia economist with Citigroup in Hong Kong.

The yen briefly dipped against the dollar after the cut, which will take effect on Thursday. [ID:nLT720377]

Central banks around the globe are scrambling to cut interest rates to cushion the economic fallout of the worst financial crisis since the Great Depression in the 1930s.

“I think this is also part of a coordinated move of global central banks to bail out the financial markets,” said Zhao Qingming, senior economist at China Construction Bank in Beijing.

“Though other central banks have not announced rate cuts yet, we can see that they are on the way,” he said.

The Federal Reserve is widely expected to cut U.S. interest rates on Wednesday. The European Central Bank has pointed to the scope for lower borrowing costs now that inflation is receding. And the Bank of Japan is gearing up to cut rates at a meeting on Friday, according to a source with knowledge of the matter.

The PBOC also cut interest rates on Sept. 15 and Oct. 8. Unlike on those two occasions, however, it did not reduce banks’ reserve requirements this time.

The last move three weeks ago coincided with rate cuts by leading central banks around the world, fanning speculation that other banks will follow the PBOC’s latest easing before long.

“China is the most important emerging market now, and so its joining global coordinated rate action certainly should make an even clearer policy statement that they want to do whatever it takes to calm down the markets,” Huang said.


As well as easing monetary policy, Beijing has rolled out a series of measures in the past week to support growth.

The government has increased tax rebates for exporters of labour-intensive goods and lowered down payments and mortgage rates for first-time home buyers.

Infrastructure spending is being ramped up, especially on railways, and media reports say a big effective cut in value-added tax will kick in on Jan. 1.

“All this highlights the global scale of the weakening growth profile. Even China is not immune,” said Audrey Childe-Freeman, senior foreign exchange strategist at Brown Brothers Harriman.

“Pro-active fiscal/monetary policy responses can only be encouraged. It is in everybody’s interest that China avoids a hard landing scenario,” she said.

The cut, which takes effect on Thursday, comes a little earlier than expected, said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong.

“It does suggest some growing concern about the economic outlook,” he said.

Chinese exports are slowing as overseas demand wilts, while the property sector, which accounts for a quarter of fixed-asset investment, is in full retreat, hitting the construction and metals industries hard.

“We can’t rule out another rate cut before the end of the year,” Simpfendorfer said.

Goldman Sachs said it expects further cuts of as much as 150 basis points by the end of 2009.

The central bank announced the cut on its website, www.pbc.gov.cn. It provided no explanation for the easing.

The PBOC said rates for loans of 12 months and longer would drop by 27 basis points, while the benchmark rate of the six-month tenor would fall by 9 basis points. Interest on current accounts remains unchanged at 0.72 percent.

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. (Reporting by Eadie Chen and Jason Subler; Writing by Alan Wheatley; Editing by Victoria Main)

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