China Battles Slowdown With Massive Rate Cut

BEIJING -- China slashed interest rates on Wednesday for the fourth time since mid-September, dramatically stepping up the pace of monetary easing to cushion the blow of global financial turmoil on the world's fourth-largest economy.

The People's Bank of China cut benchmark rates for one-year loans and deposits by 1.08 percentage points, lowering the cost of one-year borrowing to 5.58 percent and the rate on 12-month certificates of deposit to 2.52 percent.

"China is out to save itself here. The rest of Asia is strong, but all policymakers in the region and on the planet need to take their own steps. China is showing good leadership by what it has done," said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong.

The cut in the lending rate was the biggest since October 1997; that in the deposit rate was the biggest since June 1999.

The central bank also reduced the proportion of deposits that banks must hold in reserve, giving them more money to lend to businesses reeling from a drop in export demand and a downturn in the property market.

The cut in interest rates, which takes effect on Thursday, was four times bigger than the usual adjustment of 27 basis points.

The cuts come on the heels of a 4 trillion yuan ($586 billion) stimulus package unveiled on Nov. 9 designed to ramp up investment in short order in roads, railways, affordable housing and an array of public works.

"They are continuing what is the best policy prescription in these times, which is increased fiscal spending and easier monetary policy. This is a good move," Bennett said.

The initial reaction of many economists was that borrowing costs had further to fall, especially as inflation is receding fast.

"The cuts in all rates suggest that the central bank wants to send a clear signal to the market that it will continue to ease monetary policy to bolster corporate lending amid slowing domestic and global economic growth," said Lin Chaohui, a bond analyst at Guotai Junan Securities in Shanghai.

Li Yang, a researcher with the Chinese Academy of Social Sciences, the government's top think tank, said the cuts showed that growth was fading faster than expected.

Industrial growth slumped last month to a seven-year low; exports, imports, retail sales and fixed-asset investment weakened, while power generation fell 4 percent from a year earlier.

"If the economy slows and employment problems emerge, those problems may translate into social tensions, which is the biggest concern for the Chinese government," Li said.