China´s central bank cut loan and deposit rates by 0.27 percentage points last week, effective from Dec. 23, in the government´s latest move to stimulate the economy. It was the fifth time the People´s Bank of China (PBOC), the central bank, has cut rates since September this year. The benchmark one-year yuan lending rate will fall to 5.31 percent from 5.58 percent and the one-year yuan deposit rate will fall to 2.25 percent from 2.52 percent.

The cuts had been expected but the magnitude was below expectations and too small to buoy confidence. In the three earlier cuts in September and October, the central bank lowered interest rates by 0.27 percentage points each. In the fourth cut on Nov. 26, the lending and deposit rates were slashed by a bigger-than-expected 1.08 percentage points. The central bank also indicated lately that it would cut the bank reserve requirement ratio by 0.5 percentage points, which will be the fourth time the central bank cuts the ratio since September. The combination of interest rate and reserve requirement ratio cuts is expected to be more effective in helping stabilize the weakening economy.

Mr. Zhou Xiaochuan, the governor of (PBOC), noted that whether or not to further cut the rates depended on the rise of the consumer price index (CPI), the main gauge of inflation. From now till mid-2009, there exists possibilities of further interest rate cuts, he then added. Statistics from the National Bureau of Statistics showed the country´s CPI rose at a slowing annual rate of 2.4 percent in November. China’s CPI rate had slowed for seven straight months because of a sharp fall in world commodity prices and sluggish demand amid the global financial crisis.

It is expected that the latest interest rates cut can help ease China’s economic slowdown to a more manageable pace, as it shows the central government has put the focus on "maintaining stability and growth" and the leadership is also implying a moderately relaxed monetary policy.

Latest figures show the national economy is slowing drastically as a recession tightens its grip in the nation´s major trade partners such as the US and Japan. The nation´s exports dropped by 2.2 percent year-on-year in November, the first time in seven years; and it’s year-on-year industrial output growth slowed to 5.4 percent in November, down sharply from 8.2 percent in October; GDP growth slowed to 9 percent in the third quarter of this year, the fifth quarterly decline, while many economists forecast that growth could drop below 8 percent in the fourth quarter.

Analysts said the government’s decision to cut interest rates further would support its recent moves to boost investment and stimulate domestic demand. The government announced a 4 trillion yuan ($586 billion) economic stimulus package last month. Besides 1.18 trillion yuan from the State coffers, the lion´s share of the package will be financed by bank loans.

Source: China Textile Leader