Second rate cut in 1 month

By Li Qiaoyi Source:Global Times Published: 2012-7-6 1:35:06

The country's central bank announced late on Thursday that it would cut key interest rates for the second time within a month, as the world's fastest growth engine faces growing headwinds.

The People's Bank of China cut the one-year benchmark deposit rate by 25 basis points to 3 percent, while lowering the one-year lending rate by 31 basis points to 6 percent, taking effect from Friday, according to a statement posted on its website.

The latest rate cut came on the heels of the central bank's surprise rate cut effective on June 8, the first since the global financial tsunami in late 2008.

"The latest rate cut will certainly help ease credit thirst and spur economic growth," Yao Wei, China economist at Societe Generale in Hong Kong, told the Global Times.

The slash highlights the lowering of borrowing costs via an asymmetric rate cut as well as the further reduction of the lending rate floor to 70 percent of benchmark rates, down from the 80 percent announced in June, according to the central bank.

"Enterprises, which have been suffering from the high cost of credit loans, will benefit from the lending rate cut," Li Jianming, a deputy director at the China Enterprise Confederation and the China Enterprise Directors Association, told the Global Times.

Li said that businesses he surveyed had faced shrinking profit margins in the first half of the year.

The biggest beneficiary of the rate cut will be large State-owned enterprises with high leverage, with a minor impact on small and medium-sized enterprises, Lu Ting, China economist with Bank of America-Merrill Lynch in Hong Kong, said in a note e-mailed to the Global Times, adding that the cut is also "good for local governments with high leverage" as well as "existing mortgage borrowers."

The move has most economists estimating the economy might have fallen to its lowest level in three years.

"Two rate cuts within one month have rarely been seen in the past. It may be an indication that economic growth is nearing an intolerable level for the government," said Lu Zhengwei, chief economist with the Industrial Bank.

The nation's economy is likely to grow by 7.6 percent during the second quarter of the year, the lowest level since the first quarter of 2009, Lu Zhengwei predicted. China's economy grew by 8.1 percent in the first quarter, according to data from the nation's top statistical bureau.

The government has no choice but rate cuts to revive economic growth, economists said, while noting the property sector, which has been feeling the pinch of credit control in particular, may be especially inspired by the news. 

"It will be great news for the property market. Home prices are unlikely to moderate as spurred by the cut, although it is hard to foresee a recovery in home pricing," Zhang Dawei, research director at the Beijing office of Centaline Property, told the Global Times.

But Yao warned that the government would continue to exercise tight control over the property market, as the central bank also said in the statement that "financial institutions should continue to strictly abide by the differentiated home loan policy, and curb speculative real estate investments."

Zhao Qian contributed to this story

 



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