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BEIJING - China's central bank announced on Wednesday a steep cut in its interest rates -- by four times the usual margin -- in a signal that it would pull out all the stops to boost weakening economic growth.
The benchmark one-year lending and deposit rates will both be reduced on Thursday by 108 basis points, compared with the usual 27 basis points in
Chinese rate cuts, the People's Bank of China said.
"It means the government is moving on more fronts to stimulate growth," said Stephen Green, a Shanghai-based economist with Standard Chartered.
It was China's fourth interest rate cut since mid-September, and the deepest rate cut since October 1997.
Earlier this month, China announced an unprecedented four-trillion-yuan (590-billion-US-dollar) spending package to lift the economy, which grew at its slowest pace in five years last quarter.
The central bank move came a day after the World Bank said it expected China's economy to grow by 7.5 per cent in 2009, a 19-year low.
"The economic situation now is even worse than in 1998," said Xing Zhiqiang, a Beijing-based analyst with China International Capital Corporation, referring to the year just after the outbreak of the Asian financial crisis.
He said China was likely to see deflation -- or falling prices -- from next year.
"The bubbles in international commodity prices have burst and the prices of many raw materials are falling," he said.
"Moreover, the slowdown in China's own economic growth has gotten worse, triggering overcapacity and unemployment, which are likely to cause deflation as well."
After the rate cut, one-year lending rates in China will be 5.58 per cent, while one-year deposit rates will drop as low as 2.52 per cent.
With inflation at 4.0 per cent in October, it means that borrowing money from the bank is very cheap.
At the same time, putting money in the bank will be a guaranteed way to lose cash, as the real interest rate is defined as the deposit rate minus inflation.
This will provide the Chinese with a strong incentive to spend, boosting domestic consumption.
Even so, the impact may be limited, since interest rate cuts tend to mean less in China than in more developed economies, because households do not generally borrow money for spending purposes.
"To be honest, it probably helps with the margin. But at the moment the bigger impact is going to come from fiscal policy," said Standard Chartered's Green.
However, the steep cuts could also serve the purpose of making debt service cheaper, paving the way for government bond issues to finance the ongoing aggressive fiscal policies, economists said.
The central bank also announced cuts in the amount of money banks must keep in reserve.
Beginning from December 5, large banks will see their required reserve ratio drop by one percentage point, while it will go down by two percentage points for smaller financial institutions.
The reserve ratio cut will release an estimated 700 billion yuan into the banking system, analysts said.
- AFP/ir
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