The People's Bank of China, the country's central bank, decided to reduce the interest rates by a massive 1.08 per cent from Thursday, in a desperate effort to jumpstart capital investments, boost housing sale and propel domestic consumption, amid an increasing chilly economic winter of the world.
The 108 basic points reduction, announced by the official website of the central bank, is unseen in the past five years. Previously, the bank has resorted to piecemeal rate hike or reduction of only 27 basic points to finetune the economy.
In the meantime, the bank said that the deposit reserve ratio, by which a commercial bank is required to deposit a portion of its collected savings in the central bank, will be cut by 1 percent to 15 percent.The measure, effective on December 5, will increase cash supply on the money market.
The latest drastic slashing of interest rates, coupled with the massive 4-trillion yuan (US$586 billion) fiscal stimulus package announced by China's State Council, the cabinet, earlier this month, is to weigh heavily on the worldwide collective efforts in blocking a rapid slowdown of the global economy, analysts said. It might buttress investors' confidence on the stock markets.
The monetary policy revision, which cuts the yearly borrowing rate from 6.66 per cent to 5.58 percent, and the annual saving rate from 3.60 per cent to 2.52 per cent, is a clear signal by Beijing that China is no longer harassed by inflation. On the contrary, economists caution that with prices of all commodities dropping fast, and many labor-intensive factories closing doors, China is facing a likely deflation, which is an economist's nightmare.
The National Bureau of Statistics reported earlier that China's consumer price index, a major gauge of inflation, eased to 4.0 per cent in October, from 4.6 per cent in September and 4.9 per cent in August. The index for November, to be announced in mid December, is expected to drop to around 3.2 per cent, according to most estimates.
Chinese economists believe that the central bank could trim the interest rate further at the end of this year, or early in 2009, if the economy does not show evident signs of revival.
Meanwhile, top Chinese government officials are kept busy these days in an attempt to seek urgent cures to head off a further deteriorating of the world's third largest economy.
Premier Wen Jiabao and his cabinet, whose term expires in March 2013, held "in-depth talks" with top economists and corporate entrepreneurs from a wide range of industries in the past week, to probe the current economic predicament, in the hope that the central government could work out with the newest macro-control measures to "steer the economy out of trouble against a background of global turmoil", the Xinhua news agency reported on Monday.
China's annual economic growth rate slowed sharply to 9 percent in the third quarter, from 10.4 percent in the first half of the year, because of a sudden plunge in export shipments and a slumping domestic property market.
Latest official statistics showed that the industrial production and exports in October worsened, pointing to a potential crisis of unemployment as employers across the board are cutting their work force. Many export oriented labor-intensive plants in the coastal regions have shut down, thanks to a dry-up of overseas orders.