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China cuts rates to ward off slowdown

By Xin Zhiming (China Daily)
Updated: 2008-10-09 06:34

China, following other economies, cut the benchmark deposit and lending rates by 0.27 percentage point Wednesday to anchor its economy amid a worsening global financial crisis.

The reserve requirement ratio, or proportion of money commercial banks must set aside in reserve, will also be slashed by half a percentage point from Oct 15, the People's Bank of China said Wednesday on its website.

The move will help prevent economic growth from declining as the global financial market turmoil is believed to further cut into world growth, which in turn will reduce demand for Chinese exports, analysts said.

A woman walks in front of the headquarters of China's central bank, the People's Bank of China, in Beijing October 8, 2008. The central bank on Wednesday announced cuts in both interest rate and reserve requirement ratio in an effort to boost domestic economy amid worries over global financial crisis. [Agencies]

The interest rate cut will take effect from today, when the cost of one-year bank loans will fall to 6.93 percent from 7.20 percent, while the benchmark one-year deposit rate falls to 3.87 percent from 4.14 percent.

The reserve requirement ratio would be 17 percent for big banks and 16 percent for others.

The State Council, China's Cabinet, also said it would scrap the 5 percent individual income tax on interest on savings starting today to boost domestic demand.

Related readings:  Stocks rise tentatively after rate cut  Fed orders emergency rate cut to 1.5 percent  Australia cuts rate by 1%, lifting stocks  More rate cuts needed to fortify economy

China began levying a 20 percent individual income tax on interest earnings in 1999 to encourage consumption and investment. The rate was slashed to 5 percent in August last year.

"It is appropriate for the authorities to lower the interest rates and reserve requirement under the current circumstances," said Dong Yuping, economist with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

If the international financial crisis worsens and leads to a drastic slowdown of the Chinese economy, Beijing may take further measures, he said.

As the US financial woes spread to other major economies, global stock markets have tumbled this week, with Japan's Nikkei average plunging 9.4 percent Wednesday and the Dow Jones industrial average slumping for the fifth day on growing fears of a global recession.

China's domestic A-share market fell by more than 3 percent Wednesday. Analysts said the latest cuts would help stabilize the stock market, which may have continued to slide without policy support.

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