China Cuts Key Rates

China cut interest rates for the fifth time in three months to support the world’s fourth-biggest economy after trade growth collapsed because of recessions in the U.S., Europe and Japan.

The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

Exports fell for the first time in seven years last month, imports plunged and manufacturing contracted by a record. China’s slowdown will deepen before a 4 trillion yuan ($584 billion) stimulus package kicks in from the second quarter of next year, Liu He, a senior policy official, said Dec. 12.

The reserve requirement will drop to 15.5 percent for big banks and to 13.5 percent for smaller ones effective Dec. 25.

China reduced rates by the most in 11 years last month and announced the package of spending through 2010 on infrastructure and low-cost housing. The State Council pledged Dec. 13 to boost money supply by 17 percent next year to encourage lending and buoy domestic consumption.

Still, economic growth may slump to 5 percent in the first half of next year, less than half the 11.9 percent expansion in all of 2007, according to Royal Bank of Scotland Plc.

The slowdown threatens to trigger social unrest as factories close and unemployment climbs in the world’s most populous nation. It may also reduce the nation’s contribution to global growth, forecast by Merrill Lynch & Co. at 80 percent next year.

Besides the trade collapse, weakness in the property market is undermining investment, construction, consumption and economic growth. Home sales dropped 20.6 percent in the first 11 months from a year earlier, according to the statistics bureau.

The government has switched from battling inflation in the first half of the year to guarding against the risk that falling prices will contribute to the economy spiraling down. Inflation was the slowest in 22 months in November.

China needs to prepare for a worst case scenario” as the global economic slump deepens, central bank Governor Zhou Xiaochuan said Dec. 4.

China’s economy will expand by 7.5 percent next year, the least in almost two decades, the World Bank forecast last month. The nation is targeting an 8 percent expansion to generate jobs and avoid social instability, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.

China Cuts Key Rates,
12/22/2008 5:12:13 AM