China May Cut Rates Again After Central Bank Yields Decline

By Belinda Cao
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Oct. 8 (Bloomberg) -- China may cut interest rates as soon as this week after the yield on one-year central bank bills issued yesterday had the biggest drop this year, analysts said.

The People's Bank of China sold 80 billion yuan ($11.7 billion) of one-year bills at a yield of 3.9069 percent in open- market operations yesterday, 9.7 basis points lower than the previous auction of similar dated paper on Sept. 23. The yield, which fell below 4 percent for the first time this year, had a bigger drop than most analysts expected.

``The decline yesterday, together with drops in yields at the previous two auctions last month, suggest the central bank may soon cut deposit rates,'' said Xu Hanfei, a fixed-income analyst with Industrial Bank Co. ``Weaker sterilization in open-market operations also suggests the trend towards easing monetary policy as the economy slows.''

Economists at UBS AG and Morgan Stanley this week cut their forecasts for China's expansion, citing slowing export growth, weakening domestic demand and falling home sales. The central bank, which reduced borrowing costs for the first time in six years in September, said last week it will take further measures to reduce the impact of the global financial crisis on China and sustain growth in the world's fourth-biggest economy.

China cut the one-year lending rate on Sept. 15 by 0.27 percentage point, the first reduction in six years, after inflation slowed for a fourth month in August. Since July, the government has put more stress on sustaining growth in the economy on concerns it may cool further amid a global slowdown. The central bank hasn't yet cut deposit rates. The one-year deposit rate, which was last cut in February 2002, is now 4.14 percent.

Imminent Cut

A front-page commentary in today's China Securities Journal, the government's official stock market newspaper, said conditions are ``ripe'' for a rate cut.

``A rate cut may be imminent,'' the commentary said. ``Interest rates around the world are set on a downward trend. Domestically, the economy risks further slowdown as investment growth slows and the decline in exports picks up.''

Hong Kong cut its benchmark interest rate today and Australia's central bank cut its key rate by one percentage point yesterday, the biggest reduction since 1992. Economists expect the U.S. Federal Reserve to cut its benchmark lending rate from 2 percent, possibly before its Oct. 28-29 open market committee meeting. European Central Bank President Jean-Claude Trichet said Oct. 2 that officials have already considered cutting the ECB's benchmark across the 15-nation euro region from 4.25 percent.

Economic Slowdown

``China can't avoid cutting rates in the middle of a global wave of rate cuts,'' said said Qu Qing, a fixed-income analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. ``People around the world all have worries about an economic slowdown.''

The central bank will cut interest rates as many as five times by the end of 2009 and will step up spending to limit the effect of the ``global financial tsunami'' on the nation's economic growth, Qing Wang, a Hong Kong-based economist at Morgan Stanley said in a note yesterday. The investment bank cut its 2009 economic growth forecast for China to 8.2 percent from 9 percent and forecast the one-year lending rate could drop as low as 5.85 percent next year from 7.2 percent now.

``China is clearly worried about a global slowdown and how the economy will be affected, so a loosening of monetary policy would be natural,'' said Fraser Howie, head of structured products at CLSA Singapore Ltd. ``Still, the banking system in China is still so inefficient that a rate cut would have a limited effect and some direct spending on infrastructure will also be rolled out.''

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net