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China cuts benchmark interest rates by 0.27 percentage points (10/30/08)

BEIJING, Oct. 29 (Xinhua) -- China's central bank, the People's Bank of China (PBOC), announced on Wednesday it would cut benchmark interest rates by 0.27 percent to spur economic growth as of Oct. 30.

The benchmark one-year deposit rate would drop to 3.60 percent from 3.87 percent, while the benchmark one-year lending rate would fall from 6.93 percent to 6.66 percent.

This is the second such move in less than one month, highlighted the government's rising concern over the slowing economy and slumping capital market.

The previous was on Oct. 8, when the PBOC announced to cut deposit and lending rates was lowered by 0.27 percentage points and decided to cut the reserve-requirement ratio by 0.5 percentage points from Oct. 15.

"It reflects that the government is worried about a cooling down economy and other domestic problems, amid a deepening U.S.-originated world credit crisis, " said Tang Min, China Development Research Foundation deputy secretary.

China's gross domestic product (GDP) grew to 20.16 trillion yuan (2.96 trillion U.S. dollars) in the first three quarters of this year, up 9.9 percent from the same period of last year.

The growth rate was 2.3 percentage points lower than the same period of last year, and half a percentage point lower than the first half.

"This was also a timely response to the rate cuts by other central banks worldwide and part of a coordinated effort to stem the global financial crisis, " said Tang.

The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability, experts say.

Tang added, the easing in inflation has given room for the authorities to loosen monetary policy. Inflation is no longer a threat with the declining commodities prices.

China's consumer price index (CPI), the main gauge of inflation, rose 4.6 percent in September over the same period last year, off from the 12-year high of 8.7 percent in February.

"A lower interest rate will help domestic enterprises to cut business costs, and boost economic development. This is in line with the country's expectation," Tang noted.

Zhuang Jian, senior economist with Asia Development Bank echoed with Tang, saying a relaxed credit and financing environment is a key factor to enlarging domestic demand and boost consumption.

"Maintaining a fast and sound economic development is the government's top priority currently," Zhuang added.

However, Zhuang noted, monetary policy alone was not enough to boost domestic economy in the long term. Other fiscal policies were also very important.

Guo Tianyong, director of banking research center with Central University of Finance and Economics said, this move was also contribute to rebuilding people's confidence over the poorly-performing domestic stock market and real estate market.

China's stock market dropped more than 66 percent from its peak last October, while real estate prices continue to fall in recent months.

Last week, China announced an array of policies, including tax exemption and mortgage deposits reduction, to boost the falling real estate sector amid the global economic slowdown.

The interest rates on a mortgage for first time home buyers was cut by 0.27 percentage points as of Oct. 27. The floor for interest rates would be lowered to 70 percent of the central bank's benchmark rate, the central bank said.

 


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