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China cuts rates by 108 bp to aid growth

(chinadaily.com.cn)
Updated: 2008-11-26 17:10

The People's Bank of China, the country's central bank, decided to reduce the interest rates by a massive 1.08 percentage points from Thursday, in a desperate effort to jumpstart capital investments, boost housing sale and propel domestic consumption, amid an increasing chilly economic winter of the world.

A woman walks in front of the headquarters of China's central bank, the People's Bank of China, in Beijing in this file photo dated October 8, 2008. The central bank decided to reduce the interest rate by a massive 1.08 percentage points from Thursday, in a desperate effort to jumpstart capital investments, boost housing sale and propel domestic consumption, amid an increasing chilly economic winter of the world. [Agencies]

The 108 basis points reduction, announced by the official website of the central bank, is unseen in more than 10 years. Previously, the bank has resorted to piecemeal rate hike or reduction of only 27 basis points to finetune the economy.

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In the meantime, the bank said that the deposit reserve ratio, by which a commercial bank is required to deposit a portion of its collected savings in the central bank, will be cut by 1 percent to 16 percent. The reserve requirement for the country's smaller local banks is made even lower to 14 percent.

The measure, effective on December 5, will increase cash supply on the money market. Although China now has a relatively fluent flowing of credit, the reduction will add to liquidity and benefit the middle and small-sized businesses, which used to be shunned by bank credit in previous economic slowdowns.

The latest drastic slashing of interest rates, coupled with the massive 4-trillion yuan (US$586 billion) fiscal stimulus package announced by China's State Council, the cabinet, earlier this month, is to weigh heavily on the worldwide collective efforts in blocking a rapid slowdown of the global economy, Chinese analysts said.

The rates reduction was the largest since the central bank cut the rate by 1.44 percentage points in October 1997, at the height of the Asian financial crisis.

It might buttress investors' confidence on the stock markets.

The gains in the Chinese equity markets moderated in the morning session on Thursday to less than four percent after opening sharply higher to stand above the 2,000 mark, boosted by China’s biggest interest-rate cut in 11 years. The benchmark Shanghai Composite Index surged more than six percent at the opening to 2012.69, while the smaller Shenzhen index also gained nearly six percent to open at 6923.37 points.

The monetary policy revision, which cuts the yearly borrowing rate from 6.66 percent to 5.58 percent, and the annual saving rate from 3.60 percent to 2.52 percent, is a clear signal by Beijing that China is no longer harassed by inflation. On the contrary, economists caution that with prices of all commodities dropping fast, and many labor-intensive factories closing doors, China is facing a likely deflation, which is an economist's nightmare.

Xia Bing, a senior economist with the State Council Development and Research Center, a government think tank, said that the country suffered from up to 3 years' grisly deflation in the aftermath of the 1997-98 Asian financial meltdown. It was former Premier Zhu Rongji who sat at the steering and guided the country to weather the storm then.

The National Bureau of Statistics reported earlier that China's consumer price index, a major gauge of inflation, eased to 4.0 percent in October, from 4.6 percent in September and 4.9 percent in August. The index for November, to be announced in mid December, is expected to drop to around 3.2 percent, according to most estimates.

Chinese economists believe that the central bank could trim the interest rate further at the end of this year, or early in 2009, if the economy does not show evident signs of revival.

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