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China cuts interest rates to spur growth

Publication Date : 06-07-2012

 

China's central bank cut interest rates for a second time in a month, fuelling concerns that the slowdown in the world's second-largest economy is worse than predicted.

The People's Bank of China lowered benchmark deposit rates on Thursday by 25 basis points and cut lending rates by 31 basis points, effective from Friday.

The central bank cut interest rates on June 8 for the first time since 2008 to bolster economic growth.

"The limits for rates charged on individual property loans will not change and financial institutions must strictly implement differentiated policies on property loans to continue constraints on speculative purchases," the central bank said.

A leading economist said that cutting rates twice in a month suggests weak growth.

"The two cuts in interest rates within a month indicate that the GDP growth rate in the second quarter is indeed weaker than expectations," said Lu Zhengwei, chief economist at the Industrial Bank, adding he expected that the figure would be 7.6 per cent.

Xu Jianping, president of Soochow Asset Management, said the central bank's move is based on falling inflation and gloomy data for the second quarter, which have yet to be released.

"The cut is aimed to stimulate the economy which is losing steam," he said.

Apart from shoring up the economy, the surprising move is in line with other central banks of major economies, said Zhang Monan, an economist at the State Information Centre.

The Bank of England announced on Thursday it will increase its quantitative easing stimulus policy by 50 billion pounds (US$78 billion) while keeping the main interest rate at a record low of 0.5 per cent.
The European Central Bank also announced on Thursday it will reduce the interest rate on the main refinancing operations of the euro system by 25 basis points to 0.75 per cent.

"It is a replica of last year, when the world's six major central banks joined hands to save the market. It seems that the world's major banks have a tacit agreement," Zhang said.

Last December, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the US Federal Reserve (Fed), and the Swiss National Bank announced coordinated action to increase their capacity to provide liquidity support for the global financial system.

Two hours before the Fed announcement, China cut the reserve requirement ratio for commercial banks by 50 basis points, the first reduction since 2008.

Qiu Zhiming, chairman of Beifa Group, a Ningbo-based stationery maker, said despite the cut he does not expect to get cheaper loans.
"Lenders always charge small companies more by adding charges. We are in a weak position in negotiations with banks."

While Zhu Jianfeng, general manager of Wenzhou Gold Emperor Shoes, expected some loans to be cheaper, the overall benefits will be limited.

"We would prefer tax cuts than interest rates cuts."

The central bank also allowed commercial banks to set the interest rates charged on their loans at or above 70 per cent of the government's benchmark rate, down from the previous 80 per cent.

Cutting the bank reserve requirement will bring more money into the market, said Liu Ligang, head of China economics study at the Australia and New Zealand Banking Group, forecasting another cut in the requirement in July. He said the central bank's move is due to a lower-than-expected inflation rate, which is scheduled to be published on July 9, and the need to keep interest rates in line with other countries to avoid capital inflow pressure.

China's economy is facing its most difficult moment in 30 years while GDP growth this year will be less than 8 per cent, said Oliver Chiu, head of research and investment advisory in the wealth management unit of Citibank (China).

The lender has lowered its forecast for economic growth in 2012 to 7.8 per cent, and GDP growth for the second quarter might be as low as 7.3 per cent, he said.

With external demand hit by the European debt crisis, growth in fixed-asset investment would be hard to shore up, as local governments are tangled in debt issues, he said.

"Local governments already have little capacity to spur infrastructure construction again after spending 4 trillion yuan ($630 billion) during the global financial crisis."

"However, we don't need to worry about China too much as the government still has sufficient space to resort to fiscal policies as well as monetary instruments."

He forecast there would be two cuts in interest rates and two cuts in the reserve requirement ratio for commercial banks in the second half.
GDP growth for the first half of the year will stand at 7.8 per cent, and the official target of 7.5 per cent throughout the year will be achieved, Zeng Peiyan, former vice-premier and president of the China Centre for International Economic Exchanges, said on Thursday while attending a China-Japan entrepreneurs exchange meeting in Yokohama, Japan.
"Currently the economy is not far away from the 'turning point', and in the second half it will rebound," he said, adding in the next 10 to 20 years China will have "very sound" economic growth.

 

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