China Cuts Interest Rate for 2nd Time in Three Weeks

By [bn:PRSN=1] Li Yanping [] and William Bi
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Oct. 8 (Bloomberg) -- China cut interest rates for the second time in three weeks as the global financial crisis threatened to undermine the world's fourth-largest economy.

The People's Bank of China said it would lower the key one- year lending rate by 27 basis points to 6.93 percent, and the one-year deposit rate by the same amount to 3.87 percent, according to a statement on its Web site. It also cut the proportion of deposits that banks must set aside by 50 basis points effective Oct. 15.

The cut came as the Federal Reserve, European Central Bank and four other central banks lowered interest rates in an emergency coordinated bid to ease the economic effects of the financial crisis. China cut borrowing costs for the first time in six years on Sept. 15 to reduce the risk of an economic slump.

``We expect China's government to continue loosening monetary policy and draw on its fiscal resources to bolster investments in infrastructure,'' said Jing Ulrich, Hong Kong- based chairwoman of China equities at JPMorgan.

China's announcement didn't include any reference to the cuts from the Fed, the ECB and central banks in the U.K., Switzerland, Sweden and Canada.

``China's participation in this seemingly coordinate rate cut is encouraging given its importance to the global economy,'' said Ulrich. ``China is becoming more responsible as an involved stakeholder in the global financial community.''

Shared Goal


``All countries should take the responsibility to cooperate as we share the same interest and goal in facing this crisis,'' the People's Bank of China said Oct. 4, after the U.S. Congress approved that nation's $700 billion bailout plan.

Australia cut its benchmark interest rate by one percentage point, the most since a recession in 1992, yesterday. Hong Kong lowered its base lending rate for banks today.

China shifted emphasis from fighting inflation to sustaining growth in July, when the Communist Party's top decision-making body, the Politburo, dropped any reference to maintaining a ``tight'' monetary policy.

Tax Cut

China will temporarily eliminate individuals' taxes on interest earnings from savings accounts, the official Xinhua News Agency said in a statement on its Web site today, citing the State Council.

``We also see the abolishment of the 5 percent interest income tax as modestly positive for personal consumption,'' said Liang Hong, an economist with Goldman Sachs Group Inc. in Hong Kong.

Signs of weakness in China's economy, which has slowed for four quarters, span industrial production, export orders and the 62 percent fall in the CSI 300 Index of stocks this year. Output grew by the least in six years in August and orders dropped in the third quarter to the lowest level since 2005.

Property has slumped in cities including Shenzhen, where house prices slid 6.4 percent in August from a year earlier, after gains of as much as 21 percent during 2007.

``There are challenges ahead, in particular, a housing sector correction, financial difficulties among small- and medium size firms, and weakening export growth,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. ``The urgency for fiscal and monetary easing is less pressing in China relative to the rest of the world as growth slows, not slumps.''

Yuan's Gains

The central bank has already reduced gains by the yuan against the dollar, eased annual quotas that limit lending by banks and increased export-tax rebates for garments and textiles to protect jobs and stimulate growth.

Morgan Stanley cut this month its forecast for China's economic growth to 9.8 percent this year and 8.2 percent next year. That's down from an 11.9 percent expansion in 2007.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net