China cuts benchmark interest rates, first since July 2012

Beijing

CHINA cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world's second-largest economy.

The one-year deposit rate was lowered by 0.25 percentage point to 2.75 per cent, while the one-year lending rate was reduced by 0.4 percentage points to 5.6 per cent, effective Saturday, the People's Bank of China said on its website on Friday.

The reduction puts China on the side of the European Central Bank and Bank of Japan in deploying fresh stimulus and contrasts with the Federal Reserve, which has stopped its quantitative easing programme. Until Friday, the PBOC had focused on selective monetary easing and liquidity injections as China heads for its slowest full-year growth since 1990.

The Chinese central bank also ruled out the need to use aggressive measures to stimulate growth as China's economy is still growing at a reasonable speed. It said in a statement after the rate cut that it would further free up China's interest rates by allowing companies and individuals to sell negotiable certificates of deposits.

"It's absolutely the right thing to do," said Wang Tao, chief China economist at UBS AG in Hong Kong. "Real interest rates have moved up significantly with slowing growth and inflation, which hurts corporate cash flow and balance sheet and threatens to increase non-performing loans."

The cut in the benchmark rates follows liquidity injections and targeted cuts to reserve requirements. Although the PBOC scrapped controls on most borrowing costs in July 2013, banks still use benchmark rates as a guide for loans, including mortgages.

The PBOC was said to have added money to the banking system on Friday as a cash shortage stemming from new share sales drove the benchmark money market rate up by the most since July. The PBOC on Nov 6 confirmed that it pumped US$126 billion to the country's lenders via a newly-created tool called the Medium-term Lending Facility, including 500 billion yuan (S$105.8 billion) in September and 269.5 billion yuan in October.

Data released on Nov 13 showed that the economy's slowdown deepened in October. Factory production rose 7.7 per cent from a year earlier, the second weakest pace since 2009, while investment in fixed assets such as machinery expanded the least since 2001 from January through October. Retail sales gains also missed economists' forecasts last month.

Aggregate financing in October was 662.7 billion yuan, the central bank said last week in Beijing, down from 1.05 trillion yuan in September and lower than the 887.5 billion yuan median estimate in a Bloomberg survey of analysts. New local currency loans were 548.3 billion yuan, and M2 money supply grew 12.6 per cent from a year earlier.

Friday's move suggests a shift towards pro-growth policies that may fuel even more debt. China's total debt reached 251 per cent of gross domestic product as at June, up from 234 per cent in 2013 and 160 per cent in 2008, according to Standard Chartered estimates. Bloomberg, Reuters