China Cuts Rates

China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dim the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point.

Lehman Brothers Holdings Inc. filed for bankruptcy today and Merrill Lynch & Co. agreed to be sold, adding to evidence that the credit crisis is deepening and threatening the global economy. Cooling inflation has given China room to cut borrowing costs and protect jobs in the world's fourth-largest economy.

China's inflation was the weakest in 14 months in August, slowing to 4.9 percent, export growth cooled and industrial production grew by the least in six years, according to data released last week.

The rate cut is ``to help solve important problems in our economy for its continued stable and fast development,'' the central bank said in the statement.

China's economy expanded 10.1 percent in the three months to June 30 from a year earlier, the fourth straight quarter of slower growth. From July, policy makers dropped references to a ``tight'' monetary policy and put extra emphasis on sustaining the economic expansion.

Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, filed for bankruptcy after losing 94 percent of its market value this year. Bank of America Corp. agreed to acquire Merrill Lynch & Co. for about $50 billion as the credit crisis claimed another of America's oldest financial companies.

China's central bank had pushed the reserve requirement for banks to a record 17.5 percent in June. The nation's biggest banks were excluded from the reduction announced today.

Those exempted were: Bank of China Ltd., Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank Corp., Bank of Communications Co. and Postal Savings Bank of China.

The requirement for smaller banks drops by 1 percentage point from Sept. 25. For lenders in earthquake-affected areas, the reduction is 2 percentage points.

The central bank left deposit rates unchanged.

China Cuts Rates, Bloomberg
9/15/2008 4:54:13 AM