Bank rates cut for first time in four years
Denise Tsang, Lulu Chen and Anita Lam
China cut interest rates for the first time since 2008 yesterday in a surprise move that underscores Beijing's concerns about a hard landing for the world's second-biggest economy.
Also, in an unprecedented move, Beijing decided to allow banks more flexibility to set their rates, in what economists say is a key step towards sweeping financial reform.
The People's Bank of China cut rates by 25 basis points for 12-month lending and deposit interest rates starting from today to counter a deepening economic slowdown as the euro-zone debt crisis worsens.
The benchmark one-year lending rate will drop to 6.31 per cent from 6.56 per cent while the one-year deposit rate will fall to 3.25 per cent from 3.5 per cent
The move had an immediate effect on stock markets around the world with European stocks closing higher, helped also by signs that euro-zone leaders were edging towards the tough steps needed to tame the debt crisis. Stocks also rose in New York, where at midday the Dow Jones was up 0.7 per cent.
Some economists said a further one or two rounds of China interest rate cuts would take place this year as part of a more 'decisive monetary easing', which includes several rounds of reductions in the amount of funds reserve banks must aside when lending, or the reserve requirement ratio.
They anticipated that the central government will step up the pace of approving investment and infrastructure projects, and offer incentives to fuel domestic consumption.
'Many macroeconomic indicators, to be released over the weekend, will be very weak, and point to an increasing risk of a hard-landing,' Mizuho chief economist Shen Jianguang said. 'Top policymakers should have already seen the data, and appear to be very concerned.'
The mainland aims to achieve 7.5 per cent economic growth after the economy grew 9.3 per cent last year. The growth fell to 8.1 per cent in the first quarter from 8.9 per cent in the final quarter last year. UBS estimated the growth could slow further to 8 per cent between April and June.
Last month the World Bank cut its forecast on the mainland's economic growth by 0.2 of a percentage point to 8.2 per cent this year, the lowest since 1999, and called for fiscal stimulus measures and monetary easing to boost growth.
Premier Wen Jiabao said recently the mainland was determined to break banks' monopoly and seek sustainable growth through financial reforms.
Some analysts said the decision to allow banks to offer a premium on top of the benchmark interest rate for deposits was a strong signal Beijing is making room for interest rate liberalisations.
In the past, banks could offer deposit interest rates based only on the benchmark interest rate set by the central bank. But the new rules allow banks to offer a 10 per cent premium based on the benchmark.
At the same time, banks will be allowed to offer loans at a 20 per cent discount to the benchmark lending rate, previously capped at 10 per cent.
'This will most likely cause banks to offer a higher price to attract deposits and a lower price for loans, which could pressure their lending profitability,' said Stanley Li, an analyst at Mirae Asset Securities.
Mainland banks have for the past year suffered from low deposit growth.
The amount (HK$4.9 trillion) of fiscal stimulus rolled out by Beijing in the 2008 financial crisis, when interest rates were last cut