China May Cut Rate to Prevent Economic `Hard Landing'

By Li Yanping and Wang Ying

Oct. 30 (Bloomberg) -- China may keep lowering interest rates after three reductions in two months as the global financial crisis drags down exports and production.

The People's Bank of China late yesterday reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent. The bank also said in a statement on its Web site that the deposit rate will drop to 3.60 percent from 3.87 percent.

``This rate cut further underscores the authorities' determination to take aggressive policy measures to prevent a hard landing of the economy,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``We now call for four more rate cuts through 2009.''

The expansion of the world's fourth-largest economy slowed to 9 percent in the third quarter from 11.9 percent in 2007 and industrial production grew at the slowest pace in six years in September as export markets dried up. The Federal Reserve on Oct. 29 cut its benchmark rate by half a percentage point to 1 percent, matching a half-century low. The European Central Bank has signaled that it may also lower rates.

Economic growth has decelerated for five straight quarters. Signs of weakness span property, industrial production, export orders, and the 69 percent fall in the CSI 300 Index of stocks this year.

The rate reduction ``shows that the government is pulling out all the stops to make sure that the gentle economic slowdown seen so far doesn't turn into something more serious,'' said Mark Williams, an economist at Capital Economics Ltd. in London.

Export Demand Wanes

Export orders dropped in the third quarter to the lowest level since 2005. Home sales plunged 56 percent in Beijing and 39 percent in Shanghai in the first eight months from a year earlier, according to the Xinhua News Agency.

Sustaining growth is the government's ``first priority,'' Premier Wen Jiabao said Oct. 25.

The government has raised export-tax rebates, cut costs for home buyers and pledged infrastructure spending to protect jobs and stimulate growth.

A global slowdown is curbing demand for Chinese goods. The International Monetary Fund estimates that advanced economies will expand 0.5 percent next year, the slowest pace since 1982.

China cut borrowing costs for the first time in six years on Sept. 15, the day U.S. investment bank Lehman Brothers Holdings Inc. filed for bankruptcy. It followed up with another reduction on Oct. 8 as the U.S. Federal Reserve and five other central banks made emergency coordinated reductions to counter the financial crisis.

Both cuts were accompanied by reductions in the proportion of money that banks must set aside as reserves.

Currency Policy

The People's Bank of China has stalled gains by the yuan against the dollar since mid-July and eased annual quotas that limit lending by banks, to protect jobs and stimulate growth.

It ratcheted up interest rates when the government was trying to stop the economy from overheating. 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 a ``tight'' monetary policy.

Consumer-price increases have slowed after reaching the fastest pace in 12 years in February.

``Beijing's shift to focusing on inadequate economic growth, rather than on excessive inflation, in July 2008 was the right call on their part,'' said Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets.

Capital controls, a world record $1.9 trillion of currency reserves, and a fiscal surplus will help to buffer China against the financial crisis. The nation's growth, the fastest of the world's 20 biggest economies, underpins demand for the exports of its Asian neighbors and commodities from iron ore to soybeans.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net; Wang Ying in Beijing at ywang30@bloomberg.net.