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China cuts key interest rates for second time this year

July 05, 2012|By David Pierson
  • A cyclist passes the People's Bank of China in Beijing.
A cyclist passes the People's Bank of China in Beijing. (Nelson Ching )

BEIJING -- China cut its interest rates for the second time in less than a month Thursday in an unexpected move that signals widening concern about the seriousness of the country's economic slowdown.

China's central bank said it would lower lending rates 0.31 percentage points to 6% and deposit rates 0.25 percentage points to 3%.

The move is intended to spur growth at a time when expansion in the world's second-largest economy has slowed to its weakest pace since the aftermath of the 2008 financial crisis.

"China's decision to cut interest rates again ... is a very important move," Nick Chamie, global head of foreign exchange strategies and emerging market research at RBC Dominion Securities, said in a note to clients. "This aggressive policy action reflects, in our view, a deepening concern by policymakers that the economy has yet to find a bottom and requires additional stimulative monetary settings to engineer a recovery."

China is scheduled to announce its second-quarter economic growth figures next week. Analysts expect expansion to have sunk below 8%, which would mark the nation's weakest growth since early 2009. China grew by 8.1% in the first quarter of this year, slightly above the annual target of 7.5%.

The Chinese economy has been hampered by diminished export orders and a heavily regulated property market. It remains unclear how much the central government is willing to stimulate the country with more bank lending, a key driver of growth. The last time policymakers did that, China was thrown into an inflationary tailspin.

The central bank noted on Thursday that the interest rate cuts were not intended to support speculative lending for mortgages. Beijing appears committed to deflating the country's real estate bubble despite the sector's ability to deliver growth. 

China's announcement comes on the same day the European Central Bank cut its key interest rate to a record low 0.75%.

Policymakers "may have felt that cutting rates on the day that the ECB is widely expected to do the same would deliver a bigger impact, encouraging talk of a coordinated response to the slowdown in the global economy," said Mark Williams, chief Asia economist for Capital Economics.

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