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China Cuts Interest Rates to Stimulate Economy

China's central bank on Wednesday announced cuts in both the interest rate and reserve-requirement ratio in the latest effort to boost the domestic economy amid worries over the deepening global financial crisis.

The deposit and lending rates would be lowered by 0.27 percentage points from Thursday and the reserve-requirement ratio would be down by 0.5 percentage points from October 15, the People's Bank of China (PBOC) said.

"This was mainly out of concerns over an economic slowdown," said Ba Shusong, deputy chief of the Finance Research Institute under the Development Research Center of the State Council.

"The rate cut was expected as the world was faced with a cycle of interest rate cuts," he told Xinhua.


The loosening in monetary policy, the second such move in less than a month, highlighted the government's rising concern over the slowing economy and slumping capital market.

The PBOC cut the benchmark one year lending rate by 0.27 percentage points on Sept. 16, the first rate cut in six years. It also lowered the reserve requirement at medium- and small-sized lenders by 1 percentage point as of September 25.

Tang Min, China Development Research Foundation deputy secretary, echoed Ba's viewpoint.

Tang said the government made the move mainly out of concerns over domestic problems. "The deepening U.S.-originated credit crisis has impacted the psychology of Chinese and also the real economy," he told Xinhua.

Investors, gripped by lingering fears of global economic downturn, dumped equities to drive the stock market down 66 percent from its peak last October.

China's gross domestic product (GDP) expanded 10.1 percent in the second quarter of the year, marking a deceleration for four consecutive quarters.

Its exports, a major driver behind the economy, reported slowing growth this year as the credit crisis reduced overseas demand for its goods. This has led to the closures of tens of thousands of local exporters and also job losses.

Local businesses bore the brunt of higher borrowing costs and were even finding it difficult to get credit after last year's tightening measures aimed at curbing inflation and averting economic overheating.

The easing in inflation has given room for the authorities to loosen monetary policy. The consumer price index rose 4.9 percent in August, off from the 12-year-high of 8.7 percent in February.

"Inflation is no longer a threat with the declining commodities prices," Tang said.

The monetary policy has been starting to loosen and the trend would not change in the short term, said Zhuang Jian, an Asian Development Bank (ADB) economist. "The whole world doesn't have strong confidence in the economic outlook."


In another move to boost domestic demand, the State Council, China's Cabinet, said it would scrap the 5 percent individual income tax on savings interest earnings starting on Thursday.

China began levying a 20 percent individual income tax on interest earnings in 1999 to narrow the income gap and encourage consumption and investment. The tax rate was slashed to 5 percent on August 15, 2007.

The income tax cut was a must as it would help alleviate the erosion on personal income by high prices, especially given the cut in the deposit rate, Li Yang, head of the Finance Research Institute under the Chinese Academy of Social Sciences.

The tax cut, together with lower borrowing costs, would boost domestic demand, an increasingly more important driver of economy in the global credit crisis, Zuo Xiaolei, China Galaxy Securities chief economist, said.


The move was also a timely response to the rate cuts by other major central banks and part of a coordinated effort to stem the global crisis, Tang said.

Six other major central banks, including the US Federal Reserve, slashed interest rates on the same day to cope with the current financial crisis.

The US Federal Reserve lowered its target for the federal funds rate by 0.5 percentage points to 1.5 percent. The Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank cut by the same margin to 3.75 percent.

Central banks of Canada, Sweden and Switzerland took similar actions. The Bank of Japan said it strongly supported these policy actions.

Australia's central bank on Tuesday slashed the interest rate by 1 percentage point, the largest cut since 1992.

(Xinhua News Agency September 9, 2008)

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