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China eases policy decisively to support economy

(Agencies)
Updated: 2008-09-15 19:01

BEIJING - China's central bank acted decisively on Monday to prop up the country's slowing economy by cutting the cost of bank loans for the first time since February 2002.

Against a background of acute stress in global financial markets, the People's Bank of China also lowered the reserve requirement for all banks, except the five largest and the Postal Savings Bank, by 1 percentage point.

Related readings:  Central bank cuts loan interest rate, reserve requirement ratio  Central bank primed to raise interest rates: Barclays analysts  BOC: Interest rate hike needed to tame inflation  Country can't let GDP growth fall too much  China's GDP up 10.4% in first half

Both cuts were unexpected.

It is the first time that the central bank has lowered the proportion of deposits that lenders must hold in reserve since November 1999.

"We all knew that there would be monetary policy relaxation in China, but we didn't expect the move would be so quick," said Gao Huiqing, an economist with the State Information Centre, a government think-tank in Beijing.

The 0.27 percentage point cut in benchmark lending rates lowers the cost of one-year bank loans to 7.20 percent as from Tuesday, the PBOC said on its website.

China adjusts interest rates in increments that are divisible by nine because it makes interest calculations easier for lenders, which work off a 360-day banking year.

With inflation still uncomfortably high, the central bank kept benchmark savings rates unchanged at 4.14 percent for one-year certificates of deposit, pointing to narrower lending margins for the vast majority of banks.

The central bank said it was acting to "maintain the stable, fast and continuous development of the national economy", the world's fourth-largest.

"It shows that the Chinese leadership has a very clear idea of where the economy is heading -- China's economy is moving into a period of adjustment," Gao said.

Quick Change

Gross domestic product expanded in the second quarter by 10.1 percent from a year earlier, slowing from 11.9 percent in all of 2007. The economic signals since then have been mixed.

Figures last week showed weakness in imports and industrial production in August, but exports held up well and retail sales barely slowed from July's record pace.

However, the property market, steel prices, car sales and airline traffic have all turned down, as have purchasing managers' indexes, a timely barometer of sentiment in the all-important manufacturing sector.

"This is a rapid change in stance: we had been expecting a gradual dismantling of lending quotas," said Stephen Green, head of China research at Standard Chartered Bank in Shanghai.

"I wonder if they're seeing worse data than anyone else and whether this will be enough to get the property market going again?" he asked.

The cut in reserve requirements, which takes effect on September 25, marks the beginning of a reversal of a string of 18 increases between July 2006 and June 2008 to mop up cash flooding into the banking system from China's balance of payment surplus.

The big five banks and the postal savings system, which account for the lion's share of Chinese deposits, will still have to tie up a record 17.5 percent of those deposits at the central bank instead of lending them out.

Analysts said the central bank cut the requirement for smaller banks because it is they that are the biggest providers of loans to small and medium-sized enterprises, which have been hardest hit by a tightening of credit quotas since the start of the year.

Banks in areas hit by a deadly earthquake centred on Sichaun province on May 12 will benefit from a cut of 2 percentage points in their reserve requirements, the PBOC said.