China, spurred by falling inflation and the need to bail out the teetering debt-laden state sector, today cut interest rates for the second time this year. China's central bank announced yesterday it would shave an average of 1.2 percentage points off the lending rates and 1.5 percentage points off deposit rates, according to Xinhua (the New China News Agency). Xinhua quoted an unnamed leading official of the People's Bank of China, saying the latest cuts, much bigger than those on May 1, were aimed at further relieving the interest burdens of enterprises in the midst of falling inflation. After buying on talk of an interest rate cut on Wednesday, investors took profit yesterday. This saw the most active 10-year bond and stocks on the Shanghai and Shenzhen markets edging down. The official said the cuts on medium and long-term loans were bigger than the average cut in lending rates. Interest on loans for three to five years for fixed asset investment have been cut to 11.7 per cent from 14.94 per cent, while rates on loans for five years or more have been cut to 12.42 per cent from 15.12 per cent. Long-term savings rates saw the deepest cuts. The five-year deposit rate was shaved by 3.06 percentage points to 9 per cent. Economists said yesterday the cuts signalled a further relaxation of China's tight monetary policies of the past three years. They said the cuts would help boost the bank's profits. The cuts were good news for the country's stock and bond markets, as well as the Chinese companies listed in Hong Kong, they said. They warned the cuts would be unlikely to help Chinese company profits in the short term. A deputy research fellow at the Chinese Academy of Social Science's economic institute, Yang Fan , said the help for ailing state-owned enterprises would be limited as their problems were structural and could not be cured by monetary policies. Yesterday the central bank official took pains to note that the latest cuts did not mean a reversal of its efforts to maintain an 'appropriately tight' monetary policy over the next five years as inflationary pressure still abounded. Jardine Fleming Asia Research China economist Daryl Ho said falling inflation boosted the central bank's latest cuts, just less than four months after the May 1 cuts. On May 1 the central bank cut deposit rates by an average 0.98 percentage points and lending rates by 0.75 percentage points. China's benchmark retail price inflation fell to 6.9 per cent in the first seven months of this year, down from 14.8 per cent in 1995 and 21.7 per cent in 1994. Monthly inflation for July fell to a near four-year low at 5.8 per cent. 'The July inflation figures have been crucial to the central bank's decision to cut again as it wanted to see the impact of the 20 per cent rise in government grain purchase price in June,' Mr Ho said. Xinhua said yesterday that monthly inflation for the rest of the year would continue to fall. Most economists thought it would take some time for the central bank to gauge the impact of the cuts, and it seemed unlikely there would be any more rate cuts this year. But Mr Yang said: 'There is a chance for a further cut later this year if [the PBOC] sees inflation would be kept to the 8 per cent level for the year.' He originally expected the latest round of cuts would see a reduction of about two percentage points for both deposits and loans. The government could certainly reach its target of keeping inflation at or below 10 per cent, he said.