China Cuts Interest Rates, Signaling Slower Growth

July 6, 2012
The cut will effectively adjust the one-year deposit rate to 3% and the one-year loan rate to 6%, the central bank said.

China on Thursday cut interest rates for the second time in a month, a surprise move that analysts said might indicate that the world's second-biggest economy is slowing quicker than expected.

The changes, which take effect Friday, will see the benchmark one-year lending rate drop by 0.31 percentage points and the deposit rate fall by 0.25 percentage points, the central bank said in a statement on its website.

The cut will effectively adjust the one-year deposit rate to 3% and the one-year loan rate to 6%, the bank said.

The central bank did not immediately provide a reason for the rate cut, but analysts said China's economic planners might have acted after analyzing data for the second quarter that is due to be released next week.

"On the one hand, the move shows inflation in June may not be high," said Liao Qun, chief economist of Citic Bank International in Hong Kong.

"On the other this implies that economic data may turn out to be weaker than expected, with the second quarter recording slower economic growth than the first quarter."

Ting Lu, a Hong Kong analyst for Bank of America-Merrill Lynch, agreed the central bank's aggressive move could signal that June's second quarter data "might be worse than expected."

Slowing Growth

China's economy grew an annual 8.1% in the first quarter of 2012 -- its slowest pace in nearly three years.

Among the more recent evidence to show China's economy is struggling, manufacturing activity contracted for the eighth consecutive month in June, British bank HSBC reported on Monday.

Mark Williams, chief Asia economist for Capital Economics, also pointed to reports this week suggesting that lending by the major banks was lower in June than in May, and that economic recovery depended on a rebound in credit growth.

The Chinese government already has reduced its economic growth target for this year to just 7.5%, down from actual growth of 9.2% last year and 10.4% in 2010.

More Interest-Rate Cuts Ahead?

China last cut interest rates on June 7, which at the time was the first move down in more than three years, and Ting said there could be similar moves in the second half of the year.

Andy Xie, an independent Shanghai-based economist, described China's current economic situation as "pretty dire."

"So they [the central bank] want to signal to the market that they care, [that] this is a confidence measure," Xie said.

The European Central Bank announced a cut at the same time as China, bringing rates there to a new all-time low, and Xie said the moves likely are part of a joint effort by world leaders to boost growth.

"There is a global effort to stimulate growth and China wants to join this effort, so this is probably coordinated. China wants to show that it is a team player," he said.

China previously had hiked interest rates five times from October 2010, in an effort to control surging inflation due to worries of social unrest.

Copyright Agence France-Presse, 2012   

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