Successive Bank Rate Cuts Highlight China Stabilizing Economic Growth

BEIJING, July 9 (Xinhuanet) -- The country's rare move of cutting interest rates twice within one month showed China's intense policy to stabilize economic growth, according to analysts.

As the world's second largest economy is expected to slow further in the second quarter, the central bank announced cuts in the benchmark interest rates for the second time this year last Thursday.

The People's Bank of China (PBOC) reduced the benchmark interest rate for one-year deposits by 25 basis points and that for one-year lending by 31 basis points.

It was less than a month from the previous rate cuts announced on June 7, when the benchmark rates were slashed by 25 basis-points in their first cuts since December 2008. Guo Tianyong, a professor from the Central University of Finance and Economics, believed that the central bank fully delivered its intention of maintaining economic growth.

The central bank also brought down the lower limit for lending rates to float to 70 percent of the benchmark rate from 80 percent announced in June, stepping up its bid to liberalize interest rates.

After the latest cuts, the one-year deposit interest rate will fall to 3 percent while the one-year loan interest rate will be lowered to 6 percent.

Asymmetric interest rate cut to support real economy

China has cut the reserve requirement ratio three times since late last year, demanding commercial banks to keep 20.5 percent of their cash in reserve.

Analysts believe that apart from stimulating credit demand, the central bank also has pushed ahead reform of making interest rates more market-driven by expanding the floating band of lending rates.

"It will further narrow the deposit-loan interest rate gap and force banks to concede part of their profits to the real economy," Guo Tianyong said.

The asymmetric interest rate cut will stimulate domestic demand as well as benefit borrowers. It will trigger more reasonable allocation of financial resources and eventually push forward the healthy development of real economy, echoing the policy of financial sector serving the real economy.

Impacts on real estate market

Though instigated in an attempt to bolster a slowing economy, the rate cut has reinforced fears about the rebounding of the property market.

The cut will bring down the cost of buying homes and, more importantly, boost confidence in the property market, sparking fears that the sluggish market will rebound and thereby lay waste the government efforts to return house prices to "reasonable levels" for ordinary Chinese.

However, the PBOC reiterated last Thursday the lower limit of the floating band of mortgage loan interests will remain unchanged.

"Banking institutions should continue to strictly implement the differentiated housing loans policy and continue to curb speculative home purchases," the PBOC said in the statement.

The property curbs will continue to shut out speculative demand, which means that the current price rise trend lacks potential to carry on, said Chen Long, an researcher with fdc.com.cn, a Wuhan-based real estate website.

The current rebound in the home market mainly relies on first-time buyers, which will weaken as time goes by. Sales may drop in the latter half of the third quarter, believed Hu Jinghui, deputy president of 5i5j.com, a major real estate service company in China.

Global cut for growth

The country's economy will bottom out in the second quarter with a year-on-year growth of 7.5 percent, international investment bank Barclays Capital said in a report last Thursday.

The National Bureau of Statistics is expected to release a string of economic data, including the GDP for the second quarter, and the consumer price index (CPI) for June.

Li Xunlei, chief economist for Haitong Securities, said policymakers have more room to loosen monetary policy than fiscal policy this year.

The central bank will cut interest rates at least one more time in the second half and the reserve requirement ratio another two times, he predicted.

In the meantime, also on last Thursday, the European Central Bank (ECB) cut its benchmark interest rate by 25 basis points to 0.75 percent, a record low.

The Bank of England announced on the same day to further inject 50 billion pounds (about 78 billion U.S. dollars) into the economy over the next four months via its quantitative easing (QE) program, increasing Britain's QE size to 375 billion pounds.

"Both developed and developing economies have been weaker than expected recently, prompting central banks to shift to a looser policy," said Ba Shusong, an economist with the Development Research Center of the State Council.

Analysts said that this was a global joint action to stimulate economy. In face of the worldwide economic downturn, it works more effective to cut rates simultaneously than acting alone.

And this also indicates that there will be a new set of stimulus measures coming out globally in the near future.