UPDATE 2-China cuts rates for fifth time, but timidity surprises

(Adds analysts, background)

By Eadie Chen and Simon Rabinovitch

BEIJING, Dec 22 (Reuters) - China trimmed interest rates on Monday as the latest step in a campaign to fend off a deepening economic slowdown, though the cut, the fifth since mid-September, was smaller than many analysts had counted on.

The People's Bank of China cut benchmark one-year lending and deposit rates by 27 basis points -- to 5.31 percent and 2.25 percent respectively -- a far cry from its last move slashing rates by 1.08 percentage points at the end of November.

Analysts said the move to bolster growth in the world's fourth-largest economy looked timid compared to action taken by the U.S. Federal Reserve and Japan in cutting rates almost to zero last week.

"We would have thought that given the U.S. action, and the ... central bank action around the world, the PBoC would have been inclined to go further," said Ken Peng, economist with Citigroup in Shanghai.

"Apparently they think this will be sufficient to maintain financial stability in the near term," he said.

The Chinese central bank also lowered the amount of money that commercial lenders must keep on deposit with it, cutting the required reserve ratio by half a percentage point, which economists said could free up to 300 billion yuan of extra credit.

Expectations that a rate cut was just around the corner had been firmed up by bleakening activity data and a steep decline in price pressures.

The head of the IMF and some banks have said recently that growth in China could ease to around 5 percent next year compared to the country's 8 percent target. It expanded 11.9 percent last year.

A series of officials have been unusually candid by Chinese government standards in declaring concern that a sharp slowdown could fuel unemployment and imperil the social stability that Beijing prizes above all else.

Premier Wen Jiabao emphasised again on Monday that keeping the economy on track was his overriding priority.

"At present the most important mission is to maintain balanced and fairly fast growth in the economy, and to take more direct, beneficial and effective measures," state television cited him as saying.

WEAK NUMBERS

China's factory output expanded by just 5.4 percent in the year to November, the weakest pace for a non-holiday month on record, and its exports declined for the first time in more than seven years.