New Zealand, S.Korea cut rates to counter slowing China

By Ian Chua

SYDNEY (Reuters) - New Zealand and South Korea cut interest rates on Thursday to counter the effects of sluggish global demand, and in particular subdued exports to China, their largest export market.

An outbreak of a deadly respiratory virus, Middle East Respiratory Syndrome, was another factor that prodded the Bank of Korea into its fourth easing in less than a year as anxiety over a spate of deaths has hit demand in the South Korean economy.

Worries aired on Thursday by central bankers in both New Zealand and South Korea over China's slowdown, however, reflected concerns held in all 120 countries worldwide that count China as their largest trading partner.

Fixed asset investment in China grew at its slowest rate in over 14 years last month, according to data that suggested the slowdown had longer to run in the world's second largest economy.

"Investment is vital for stabilising growth in the short term and the poor performance of investment is putting pressure on the economy," said Li Huiyong, an economist at Shenyin & Wanguo in Shanghai.

In other data released on Thursday, industrial output and retail sales growth at least showed signs of steadying, and were largely as expected.

Cutting interest rates for the first time in four years, the Reserve Bank of New Zealand flagged several risks to China's growth, including doubts about the steps taken by Beijing so far to boost growth.

"Uncertainty remains about the effectiveness of the policy-easing measures enacted so far," Governor Graeme Wheeler said after RBNZ cut its cash rate to 3.25 percent, from 3.50 percent.

Wheeler kept the door open for more rate reductions, partly in an attempt to pull down an "overvalued" local dollar.

Countries across Asia are increasingly worried that their economies are becoming less competitive because of currency factors. Some policymakers fear they could be forced into competitive depreciations to protect exports and defend home markets. The yen's fall to a 13-year low against the dollar late last week heightened fears of a spreading "currency war".

The weaker yen has hurt South Korean exporters, in particular, as they compete with Japanese rivals selling cars and electronic goods to the world.

Bank of Korea (BOK) lowered its base rate by a quarter point to a record low 1.5 percent. Governor Lee Ju-yeo said South Korea's exports have been hurt by the slowdown in China, and the world in general.

"Until May, we thought the weakness from exports could be offset by improvements in domestic consumption," said Lee.

However, the MERS outbreak has clearly hit local demand, Lee said. South Korea has reported 122 cases and nine deaths from MERS, in the largest outbreak outside Saudi Arabia.

"From here, we believe the BOK will pause and watch closely for signs of a worsening in consumer sentiment and any deepening in contraction in exports, especially to China," analysts at Barclays wrote in a note to clients.

The People's Bank of China has cut interest rates three times in six months, but economic growth has continued to slow from last year's 7.4 percent.

Analysts had expected it to grow around 7 percent this year, meeting the government's target, the slowest pace in a quarter of a century. The dismal investment figures, however, prompted some analysts to make downward revisions to forecasts.

"We previously expected second-quarter economic growth to be 7 percent, we now expect growth to slow to 6.8 percent," Li at Shenyin & Wanguo said.

(Additional reporting by Koh Gui Qing in BEIJING; Editing by Simon Cameron-Moore)