China May Cut Rates Again, Boost Spending for Growth

By Li Yanping and Kevin Hamlin

Sept. 16 (Bloomberg) -- China may cut interest rates again, ease limits on bank lending and boost spending to spur economic growth after lowering borrowing costs for the first time in six years.

``Policy makers will consider further interest-rate cuts in the coming month, in conjunction with a more proactive fiscal policy,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong. The central bank yesterday reduced the one-year lending rate and lowered the proportion of deposits that the nation's smaller banks must set aside.

The slowest inflation in 14 months gave China room to lower borrowing costs and protect jobs as the outlook for exports dims and the credit crisis deepens. China's stocks tumbled today after Lehman Brothers Holdings Inc. filed for bankruptcy and Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion.

``A gradual easing cycle has probably begun,'' said Alec Young, an international equity strategist at Standard & Poor's in New York. ``The focus is no longer on inflation and is more on China's growth. The rest of the world is flirting with a recession and China's growth is slowing too.''

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective today. It lowered the reserve-requirement ratio for smaller banks to 16.5 percent from 17.5 percent.

`Important Problems'

The CSI 300 Index of stocks fell 4.4 percent as of 9:51 a.m. in Shanghai today. The yuan rose 0.3 percent to 6.8245 against the dollar, the biggest increase in two months, as the U.S. currency slumped.

The rate cut is ``to help solve important problems in our economy for its continued stable and fast development,'' the central bank said in a statement on its Web site yesterday, when markets were closed for a holiday.

In July, the central bank reduced restrictions on how much banks can lend by raising 2008 loan quotas for national banks by 5 percent and regional lenders by 10 percent, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, and China Merchants Bank Co.

It's likely those quotas, the main constraint on borrowers, will be eased again, said Mark Williams, a London-based economist with Capital Economics Ltd. The rate cut will have a limited impact on the economy because bank lending financed just 15 percent of fixed investment last year, Williams said.

Shanghai Stocks Fall

The Shanghai Composite Index of stocks declined 4.6 percent to 1985.04, dropping below 2000 for the first time since 2006.

It was ``suspicious'' that the central bank had acted when the index seemed set to drop below 2,000, Williams said, adding that some people thought that level ``was a floor at which the government would intervene to shore up the market.''

China last week released data indicating that the economy has slowed.

Inflation cooled to 4.9 percent in August, export growth slowed and industrial production expanded by the least in six years. China's economy expanded 10.1 percent in the three months to June 30 from a year earlier, the fourth straight quarter of slower growth.

The weakness in China's asset markets is not just in stocks. Property could be headed for a ``meltdown'' as home prices and sales decline, Morgan Stanley said Sept. 12.

``This is the beginning of an easing cycle in China,'' said Darius Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong.

China has already slowed gains by the yuan against the dollar to protect jobs at exporters of shoes, toys and clothes and raised export-tax rebates for garments and textiles.

Infrastructure Spending

Infrastructure spending is a possible tool for stimulating economic growth. Officials are working on a plan for as much as 400 billion yuan ($58 billion) of spending and tax cuts, according to economists and reports in domestic news media.

China's central bank pushed the reserve requirement for lenders to a record 17.5 percent in June. The biggest banks are excluded from the reduction. Those exempted are: Bank of China Ltd., Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank Corp., Bank of Communications Co. and Postal Savings Bank of China.

The requirement for smaller banks drops by 1 percentage point from Sept. 25. In areas affected by the Sichuan earthquake, the reduction is 2 percentage points.

The central bank left the key deposit rate unchanged at 4.14 percent, narrowing banks' margins on loans.

Zhu Baoliang, the chief economist at the State Information Center, a government research agency, said August's economic data probably prompted yesterday's moves, rather than events in the U.S.

In the U.S., banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity as Lehman filed for bankruptcy and Bank of America Corp. agreed to acquire Merrill. The Federal Reserve may reduce the benchmark interest rate today to 1.75 percent from 2 percent, according to the futures market.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Kevin Hamlin in Beijing on khamlin@bloomberg.net