July 5, 2012 / 11:46 AM / 6 years ago

China surprises with second rate cut in weeks

BEIJING (Reuters) - China’s central bank cut interest rates for the second time in a matter of weeks on Thursday, stepping up efforts to bolster an economy that last quarter probably suffered its weakest growth since the global financial crisis.

China's nation flag flies in front of the headquarters of the People's Bank of China, the central bank, in Beijing November 30, 2011. REUTERS/Soo Hoo Zheyang

The People’s Bank of China (PBoC) also gave banks more leeway to set lending rates in a move analysts said was aimed at stimulating borrowing by creating a more competitive landscape.

China cut its benchmark rates as both the Bank of England and the European Central Bank eased monetary policy, raising speculation global policymakers had coordinated their action to lift a world economy buffeted by Europe’s debt crisis.

Underlining Beijing’s unease, the central bank’s last rate cut was just one month ago.

“It is a surprise that they are moving so quickly. It shows that policymakers’ concerns about the global economy have only grown,” said Mark Williams, an economist at Capital Economics in London.

“The rumor is that bank lending was fairly weak last month. The rate cut suggests those rumors could be true,” he said.

The benchmark one-year lending rate was cut 31 basis points to 6 percent and the one-year deposit rate was reduced by 25 basis points to 3 percent, the PBoC said in a statement on its website.

It lowered the floor for lending rates to 70 percent of benchmark rates from 80 percent previously. That means that on the one-year basis, bank lending rates can be as low as 4.2 percent.

Beijing’s latest cuts, effective Friday, come just four weeks after its previous rate cut announced on June 7, and fed concerns that a deluge of economic data from China next week would show the economy in worse shape than expected.

The world’s second-biggest economy is widely forecast to grow at its weakest pace in 13 years this year at around 8 percent. The latest rate cut underlines the risk that the downturn in growth may be longer and deeper than previously thought, some analysts said.

“The rate cut was earlier than expected. We reckon relatively weak data may have prompted the move,” said Guo Lei, an analyst at Zheshang Securities in Shanghai. “In addition, this rate cut implied some sort of global coordination.”

The PBoC announcement came after the close of Chinese markets. European shares and commodities rose though after the flurry of central bank announcements to tackle the global slowdown.

To keep the Chinese economy growing briskly ahead of a once-a-decade leadership change later this year, many investors had expected China to loosen policy by lowering banks’ reserve requirement ratio (RRR) this month.

China has already reduced the RRR, or the amount of cash that banks set aside as reserves, by 150 basis points in three moves since November to 20 percent, freeing up an estimated 1.2 trillion yuan ($190 billion) for new lending.

Analysts polled by Reuters in May had forecast Beijing would further lower the ratio to 19 percent by the end of the year.

“The fact that China is actually cutting lending and deposit rates is a bigger deal than just reducing the reserve requirement,” said David Morrison, market strategist at GFT Global.

“But there’s a great big Chinese data dump next week, so the question is whether this is a heads-up that the data will not be as good as hoped.”

A Reuters poll published on Thursday showed economists expect the data next week to show China’s economy expanded in the second quarter by 7.6 percent from a year earlier, its weakest performance since the 2008-09 financial crisis.

That would be down from 8.1 percent in the first quarter for the sixth straight quarter of slowing growth, and would be just a whisker above Beijing’s 2012 growth target of 7.5 percent.


Analysts also forecast Chinese banks lent 910 billion yuan ($143.36 billion) in June, although local media have said lending was likely far lower, citing unnamed sources.

Financial markets keep a close eye on bank lending because it is heavily steered by China’s policymakers. Beijing tells banks how much to lend, and when to lend.

Beijing will hope that the reduction in the lending floor for commercial banks will spur fresh lending in the weeks and months ahead, analysts said. The central bank had also relaxed the floor on lending rates in June and had also given more leeway on deposit rates.

But it also marks another sign of the government’s efforts to push markets along the path of liberalization. Last week, officials announced plans for an experimental zone in the southern city of Shenzhen partly aimed at allowing freer use of the yuan.

Aside from loosening policy to foster activity, China’s government has fast-tracked investment projects and rolled out new incentives to spur consumer spending on energy-efficient products.

However, it has studiously avoided any hint so far of putting together a repeat of the 4 trillion yuan fiscal spending package rolled out in 2009-10, given China is still dealing with a pile of bad loans incurred by the spending binge.

The central bank signaled no relaxation of a clamp down on the property sector, which took off following the 4 trillion-yuan stimulus package. Premier Wen Jiabao has vowed to return house prices to “reasonable levels” for ordinary Chinese.

And if China’s exports, factory output and consumption growth continue to struggle in coming months, economists say Beijing has ample room for further measures to boost activity.

“Surely we see chances of further rate cuts this year,” said Ting Lu, an analyst at Bank of America-Merrill Lynch, in Hong Kong.

“We should expect the government to be more aggressive on the margin to accelerate the start-up of new projects and the construction of existing projects and be more serious on social housing.”

Different values of China's yuan banknotes are seen in this photo illustration taken in Shanghai April 15, 2012. REUTERS/Petar Kujundzic

Additional reporting by Laura Yin and Kevin Yao; Editing by Ian Geoghegan

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