September 16, 2008 / 12:14 AM / 11 years ago

RPT-UPDATE 2-China eases policy decisively to support economy

(Repeats story first moved on Sept 15)

(Adds fresh reaction)

By Zhou Xin

BEIJING, Sept 15 (Reuters) - China’s central bank acted decisively on Monday to prop up the country’s slowing economy by cutting the cost of bank loans for the first time since February 2002.

Against a background of acute stress in global financial markets, the People’s Bank of China also lowered the reserve requirement for all banks, except the five largest and the Postal Savings Bank, by 1 percentage point.

Both cuts were unexpected. It is the first time that the central bank has lowered the proportion of deposits that lenders must hold in reserve since November 1999.

“We all knew that there would be monetary policy relaxation in China, but we didn’t expect the move would be so quick,” said Gao Huiqing, an economist with the State Information Centre, a government think-tank in Beijing.

The 0.27 percentage point cut in benchmark lending rates lowers the cost of one-year bank loans to 7.20 percent from Tuesday, the PBOC said on its website, www.pbc.gov.cn.

China adjusts interest rates in increments that are divisible by nine because it makes interest calculations easier for lenders, which work off a 360-day banking year.

With inflation still uncomfortably high, the central bank kept benchmark savings rates unchanged at 4.14 percent for one-year certificates of deposit, pointing to narrower lending margins for the vast majority of banks.

Gao Linzhi, a strategist at Great Wall Securities in Shenzhen, said the measures should help to put a floor under the Shanghai stock exchange’s main index at 2,000 points.

The index .SSEC, which closed on Friday at 2,079.67, has lost 65 percent since hitting a record high last October. The market was closed on Monday for a public holiday.

“This is obviously bad for the banking sector because of the shrinking interest rate spread, but it’s good for the real estate sector and other industries which depend heavily on borrowing,” he said.

LEHMAN’S SHADOW

The abrupt easing of policy came shortly after U.S. investment bank Lehman Brothers filed for bankruptcy and Merrill Lynch agreed to be bought by Bank of America.

But a reference to the global credit crisis was conspicuous by its absence in the PBOC’s statement. Instead, the central bank said it was acting to “maintain the stable, fast and continuous development of the national economy”, the world’s fourth-largest.

“It shows that the Chinese leadership has a very clear idea of where the economy is heading — China’s economy is moving into a period of adjustment,” said Gao at the State Information Centre.

His namesake at Great Wall agreed: “This is a strong signal that the government is shifting emphasis from fighting inflation to ensuring economic growth.”

China’s gross domestic product expanded in the second quarter by 10.1 percent from a year earlier, slowing from 11.9 percent in all of 2007. The economic signals since then have been mixed.

Figures last week showed weakness in imports and industrial production in August, but exports held up well and retail sales barely slowed from July’s record pace.

However, the property market, steel prices, car sales and airline traffic have all turned down, as have purchasing managers’ indexes, a timely barometer of sentiment in the all-important manufacturing sector.

The cut in reserve requirements, which takes effect on Sept. 25, marks the beginning of a reversal of a string of 18 increases between July 2006 and June 2008 to mop up cash flooding into the banking system from China’s balance of payment surplus.

The big five banks and the postal savings system, which account for the lion’s share of Chinese deposits, will still have to tie up a record 17.5 percent of those deposits at the central bank instead of lending them out.

“The fact that the central bank didn’t ease reserve requirements for the big banks, only smaller banks, shows it doesn’t want to ease liquidity too much,” said Shi Lei, an analyst at Bank of China in Beijing.

Shi, too, said the easing was timed primarily to bolster confidence among stock market investors after Lehman’s filing for bankruptcy protection. Bond yields could drop 10-20 basis points on Tuesday, he added. (Reporting by Zhou Xin and Alan Wheatley in Beijing and Karen Yeung and Samuel Shen in Shanghai; editing by David Stamp)

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