China Cuts Key Rates for Fifth Time in Three Months

By Li Yanping and Kevin Hamlin

Dec. 22 (Bloomberg) -- China cut interest rates for the fifth time in three months after trade growth collapsed because of recessions in the U.S., Europe and Japan.

The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

Today’s measures are likely to be supplemented by a second stimulus plan aimed at spurring consumer spending following a 4 trillion yuan ($584 billion) package in November that was focused on infrastructure. China’s exports fell for the first time in seven years last month, imports plunged and manufacturing shrank by a record, threatening to push the world’s fourth-largest economy into its deepest slowdown in two decades.

“Monetary policy is now playing a supportive role to the main show in town: fiscal stimulus,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai

The reserve requirement will drop to 15.5 percent for big banks and to 13.5 percent for smaller ones effective Dec. 25. The reduction will release a further 300 billion yuan of possible lending, according to Green.

‘Less Aggressive’

“The surprise is how small the move is,” said Mark Williams, an economist with Capital Economics in London. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

China’s economic growth may slow to 5 percent next year, less than half the 11.9 percent expansion in 2007, according to Royal Bank of Scotland Plc. The World Bank forecasts the economy will expand by 7.5 percent in 2009. The government is targeting an 8 percent expansion.

China cut interest rates by 1.08 percentage points last month, the biggest reduction in 11 years.

The Federal Reserve lowered the main U.S. interest rate to as low as zero for the first time on Dec. 16, as policy makers seek to revive credit and end the longest slump in a quarter- century. The Bank of Japan cut its benchmark rate to 0.1 percent from 0.3 percent three days later.

China’s CSI 300 Index fell for the first time in six days, closing 1.7 percent lower before the rate announcement. The yuan was little changed, closing 0.07 percent lower at 6.8510 per dollar in Shanghai.

Social Stability

China’s slowdown threatens to trigger unrest as factories close and unemployment climbs in the world’s most populous nation.

Uniden Corp., a Japanese maker of wireless communication gear including cordless phones, said Dec. 11 it will eliminate 6,200 jobs in China. Zhang Ping, China’s top economic planner, warned last month of the risk of “massive unemployment.”

China’s cabinet, the State Council, pledged yesterday to give more power to local governments to support their property markets and end a nationwide real-estate slump. The government said Dec. 13 it will boost money supply by 17 percent next year to encourage lending and buoy domestic consumption.

“The cuts are less aggressive than expected,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “The central bank may want to save bullets until next quarter and wait to see how the policies announced so far work.”

Lai and economists at HSBC Holdings Plc and Capital Economics Ltd. had anticipated at least a 54-basis-point reduction.

‘Worst Case’

The government has switched from battling inflation in the first half of the year to guarding against the risk that falling prices will contribute to the economy spiraling down. Inflation was the slowest in 22 months in November.

Exports fell 2.2 percent last month after growing 19.2 percent in October. Imports plunged 17.9 percent.

China’s exporters are facing greater payment risks and rising shipment costs as some importers grow short of cash and trade finance costs surge, Vice Trade Minister Fu Ziying said over the weekend. Compensation payouts by China’s export credit insurance company almost tripled in the first 10 months of this year, Fu said.

China needs to prepare for a “worst case scenario” as the global economic slump deepens, central bank Governor Zhou Xiaochuan said Dec. 4.

The central bank may cut its benchmark rate by a further 27 basis points and reduce the bank reserve ratio by as much as 100 basis points in January to avert the risk of deflation and add liquidity before the Chinese New Year holiday, Daiwa’s Lai said.

The government aims for an 8 percent expansion to generate jobs and avoid social instability, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.

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