China cuts interest rates

@CNNMoney July 5, 2012: 9:04 AM ET
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The Chinese central bank announced Thursday that it will cut its key lending rate to 6%.

NEW YORK (CNNMoney) -- China's central bank said Thursday it would cut interest rates, the second time in less than a month that the bank has acted to jumpstart a slowing economy.

The People's Bank of China brought its one-year lending rate down by 0.31 percentage point to 6%. The bank trimmed one-year benchmark deposit rates by 0.25 percentage point to 3%.

The rate cuts follow a slew of recent disappointing economic data, causing concern about a slowdown in growth. Economists are especially watchful, since China is now the world's second-largest economy behind the United States.

Readings earlier this week showed that China's manufacturing sector weakened in June. The Chinese government, in its survey of purchasing managers, noted that there was a sharp drop in new export orders as weakness in other parts of the world affected the Chinese economy.

In June, the central bank responded to economic concerns by cutting interest rates for the first time since 2008. The bank also tried to spur growth in May by cutting the amount of money banks are required to hold in reserves, freeing up those funds in order to boost investment.

While China's gross domestic product, the broadest measure of economic health, continued to grow at an 8.1% annual rate for the first quarter, the number was down sharply from the 8.9% growth at the end of last year.

Economists were surprised by the announcement, expecting the next benchmark rate cut no earlier than the end of July.

"There was widespread anticipation that the required reserve ratio would be cut again soon, but most were expecting the next benchmark rate cut to be delayed," said Mark Williams, chief Asia economist at Capital Economics. "This is a step beyond what was expected from policymakers."

Williams said that there are two explanations for why the decision came earlier than he initially thought. The first reason, he said, is that policymakers weren't happy with June data and decided to take swift action.

"Reports in the last couple of days have suggested that lending by the major banks was lower in June than in May, when economic recovery depends on a rebound in credit growth," he said.

The second reason is that the central bank wanted to keep pace with Europe's central bank, which cut its main lending rate to 0.75% on Thursday.

"Policymakers may have felt that cutting rates on the day that the ECB is widely expected to do the same would deliver a bigger impact, encouraging talk of a coordinated response to the slowdown in the global economy."

The announcement is seen as another step toward liberalizing the Chinese economy, something that Jay Bryson, global economist at Wells Fargo Securities, said the nation has been working toward for the last two years.

"In the U.S., the Fed isn't telling banks how much they can charge or pay for deposits ... in China, they're moving away from that," he said. "If China wants to have a world-class financial system, it needs to have a liberalized financial market, and this shows that they're moving in that direction."  To top of page

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