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UPDATE 2-China cuts rates for fifth time, but timidity surprises
December 22, 2008 / 12:03 PM / 9 years ago

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.

Consumer price inflation, running at a 12-year high in February, receded to 2.4 percent in November. Zhou Xiaochuan, China’s central banker, said last week that trend would likely continue and allow more scope for rate cuts.

“The economy is slowing more sharply than expected and I think that’s why the central bank rushed to cut rates again now,” Xing Ziqiang, economist at China International Capital Corp in Beijing said.

But he also cast doubt on any instant impact.

“The cut might need to take some time to show its effects, which I don’t think will be very obvious. When demand is dwindling, many companies are less willing to invest even though funding costs are lower,” Xing added.

With most financial institutions having forecast sharper cuts before the end of this year, not to mention more next year, several analysts said Monday’s move was sure to be just one step in a larger cycle of monetary easing.

“It’s not enough and I expect the one-year benchmark lending rate to be cut to below 4 percent within the next six months,” said Flemming Nielson, senior emerging markets analyst at Danske Bank in Stockholm.

Monetary loosening, though a key part of the government’s arsenal, has not been its main weapon in combating the slowdown. Rather, it has turned to massive spending in the form of a 4 trillion yuan ($583.8 billion) stimulus package slated for the next two years.

The rate and reserve requirement cuts are crucial in enabling the spending boost to spread through the economy, since the government is counting on a multiplier effect to make up roughly half the headline stimulus amount.

“For every one yuan of central and local government spending, Beijing is hoping for an additional one yuan from others,” Stephen Green, chief China economist at Standard Chartered in Shanghai, said in a note to clients.

“It is the banks who will be expected to provide that financing,” he added. “More rate and reserve requirement ratio cuts push the banks in this direction.” (Additional reporting by Michael Wei, Kirby Chien and Alfred Cang in Shanghai; Editing by Andy Bruce)

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