China Cuts Key Rates Amid Strains
By ANDREW BATSON
September 16, 2008
BEIJING -- China's central bank cut interest rates for the first time in more than six years in a surprise move that underscored how concern over the strains in the U.S. financial system is reordering economic priorities world-wide.
Worries about the spillover from the U.S. appeared to lead Chinese authorities to shift decisively -- and more quickly than most anticipated -- toward supporting growth, after an inflation scare that has been their top preoccupation for more than a year.
The central bank's announcement came hours after news of the latest shocks to rattle Wall Street, with Lehman Brothers Holdings Inc. saying it would file for bankruptcy protection and Merrill Lynch & Co. agreeing to be sold to Bank of America Corp.
[China's interest rates]
With the economies of the U.S., Europe and Japan showing ever more signs of weakness -- some forecasters now expect a recession in all three -- an increasing share of the world's fortunes is now riding on continued growth in China. That is one reason the move to shore up growth in the world's fourth-largest economy is likely to be as welcome abroad as at home.
"This should ease concern about a worst-case scenario happening in China," said Wang Qing, China economist for Morgan Stanley. The central bank's rapid shift in policy is intended to "remind us that the Chinese authorities are still on top of the difficulties the economy is facing and [to] demonstrate their flexibility in managing the economic downturn," he said.
While China's economy grew at a rate of more than 10% in the first half, worries that a sharper slowdown is on the way have deepened. Demand for China's exports has weakened, stock prices have collapsed and housing sales have turned down. Last week, official data showed that inflation fell below 5% in August for the first time since June 2007, removing the main impediment to a stimulus.
"It's time for China to do all it can to safeguard our economy," said Zhao Xiao, an economist at the University of Science and Technology Beijing who has been arguing for easier economic policies. He welcomed the rate cut, saying that given the financial turmoil in the U.S., "this is something we needed to address immediately; it couldn't wait any longer."
The move, announced Monday when businesses and financial markets in China were closed for a national holiday, appeared timed to shore up shaky domestic confidence before local markets reopen Tuesday, analysts said.
The benchmark one-year lending rate will fall 0.27 percentage point to 7.2% from Tuesday, the People's Bank of China said on its Web site. Deposit rates, however, won't change, putting some pressure on banks' margins. But the move seems to recognize that at 4.14% for a one-year deposit, such rates are already low relative to China's inflation. On balance, low deposit rates encourage people to withdraw money from banks and spend more.
In its statement announcing the rate cut, the central bank made no reference to events overseas. It described the move as intended to "solve the current prominent problems in the economy" and to "maintain the steady and fast growth of the national economy."
At the same time, the central bank also reduced the amount of funds that smaller banks must keep on reserve.
--J
By ANDREW BATSON
September 16, 2008
BEIJING -- China's central bank cut interest rates for the first time in more than six years in a surprise move that underscored how concern over the strains in the U.S. financial system is reordering economic priorities world-wide.
Worries about the spillover from the U.S. appeared to lead Chinese authorities to shift decisively -- and more quickly than most anticipated -- toward supporting growth, after an inflation scare that has been their top preoccupation for more than a year.
The central bank's announcement came hours after news of the latest shocks to rattle Wall Street, with Lehman Brothers Holdings Inc. saying it would file for bankruptcy protection and Merrill Lynch & Co. agreeing to be sold to Bank of America Corp.
[China's interest rates]
With the economies of the U.S., Europe and Japan showing ever more signs of weakness -- some forecasters now expect a recession in all three -- an increasing share of the world's fortunes is now riding on continued growth in China. That is one reason the move to shore up growth in the world's fourth-largest economy is likely to be as welcome abroad as at home.
"This should ease concern about a worst-case scenario happening in China," said Wang Qing, China economist for Morgan Stanley. The central bank's rapid shift in policy is intended to "remind us that the Chinese authorities are still on top of the difficulties the economy is facing and [to] demonstrate their flexibility in managing the economic downturn," he said.
While China's economy grew at a rate of more than 10% in the first half, worries that a sharper slowdown is on the way have deepened. Demand for China's exports has weakened, stock prices have collapsed and housing sales have turned down. Last week, official data showed that inflation fell below 5% in August for the first time since June 2007, removing the main impediment to a stimulus.
"It's time for China to do all it can to safeguard our economy," said Zhao Xiao, an economist at the University of Science and Technology Beijing who has been arguing for easier economic policies. He welcomed the rate cut, saying that given the financial turmoil in the U.S., "this is something we needed to address immediately; it couldn't wait any longer."
The move, announced Monday when businesses and financial markets in China were closed for a national holiday, appeared timed to shore up shaky domestic confidence before local markets reopen Tuesday, analysts said.
The benchmark one-year lending rate will fall 0.27 percentage point to 7.2% from Tuesday, the People's Bank of China said on its Web site. Deposit rates, however, won't change, putting some pressure on banks' margins. But the move seems to recognize that at 4.14% for a one-year deposit, such rates are already low relative to China's inflation. On balance, low deposit rates encourage people to withdraw money from banks and spend more.
In its statement announcing the rate cut, the central bank made no reference to events overseas. It described the move as intended to "solve the current prominent problems in the economy" and to "maintain the steady and fast growth of the national economy."
At the same time, the central bank also reduced the amount of funds that smaller banks must keep on reserve.
--J
