China cuts key lending rate

China’s central bank slashed its key lending rate by the most in 11 years, giving support to a 4 trillion yuan ($586 billion) spending plan aimed at sustaining growth in the world’s fourth-largest economy.

The key one-year lending rate will drop 108 basis points to 5.58 per cent, the People’s Bank of China said on its website today. The deposit rate will fall by the same amount to 2.52 per cent. The changes are effective tomorrow.

China’s efforts to prevent a slump may also help to cushion the world economy from a looming recession. The nation, which contributed 27 per cent of global growth last year, underpins demand for metals, grains and the exports of its Asian neighbours.

“Lowering rates is of crucial importance,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. “The compounding effect of aggressive action will help to restore confidence and bolster growth.”

The bank lowered the reserve requirement for the biggest banks to 16 per cent from 17 per cent, effective Dec. 5. The requirement for smaller banks will fall to 14 per cent from 16 per cent. The drop in the deposit rate was the biggest since 1999.

The cuts are aimed “at ensuring enough liquidity in the banking system, and to promote steady loan growth so that monetary policy can play an active role in supporting economic growth,” the bank said.

China’s economy grew 9 per cent, the slowest pace in five years, in the third quarter. The slowdown is deepening, after export orders fell last month to the lowest level since 2005 and the property market weakened.

“In the face of the severe situation at home and abroad we face a formidable challenge to take effective measures to prevent the economy from slowing down too sharply,” Mu Hong, a vice chairman of the nation's top economic planning agency. said in Beijing on November 14.

Export and investment growth cooled in October and industrial production had the smallest gain in seven years.

Property prices and sales are falling in major cities and construction contracted in September by the most since the 1990s, according to Macquarie Securities Ltd.

China Vanke Co, the country’s largest publicly traded real estate developer, said sales declined 35 per cent in October from a year earlier.

The economy is at risk of a “drastic” decline, the finance ministry said this month.

On November 9, the government announced spending on housing and infrastructure through 2010, pledging “fast and heavy-handed investment” and a “moderately loose” monetary policy. The plan spans housing, rural development, railroads, power grids and rebuilding after May’s earthquake in Sichuan province.
 

RETURN OF THE DRAGON Latest interest rates after the cut by People’s Bank of China (%)
FIXED DEPOSITS
	Before	After
3-month	2.88	1.98
Six-month	3.24	2.25
1-year	3.60	2.52
2-year	4.14	3.06
3-year	4.77	3.60
5-year	5.13	3.87
LENDING RATES
	Before	After
Six-month	6.03	5.04
1-year	6.66	5.58
1 to 3-year	6.75	5.67
3 to 5-year	7.02	5.94
Source: Reuters

In the first half of the year, China had a “tight” monetary policy and the government tried to cool investment and tame inflation that had climbed to a 12-year high.

Now, it is stoking spending and focusing on the risk of falling prices. “The threat of inflation has basically vanished,” People’s Bank of China Vice Governor Yi Gang said on November 14 in Beijing.

The government aims to “avoid potential deflation, allow reasonable growth in money supply and loans and ensure stable economic growth,” Yi said. The government has cut taxes for exporters and eliminated quotas that restricted bank lending. The People’s Bank of China has also stalled gains by the yuan against the dollar since mid-July to protect jobs in manufacturing.

Next year’s economic expansion may be 7.5 per cent, the weakest in almost two decades, according to UBS AG.

China contributed the most to global growth in 2007, the International Monetary Fund said in a report in April. It used purchasing power parity calculations, which account for differences in the exchange rates of national currencies.