China’s central bank yesterday cut interest rates and promised to inject extra credit into the financial system if needed amid a deepening slowdown in the world’s second-biggest economy.
The cut, the first in over two years, came as factory growth has stalled and the property market, long a pillar of growth, has remained weak, dragging on broader activity and curbing demand for everything from furniture to cement and steel.
China’s rate move also comes after the Bank of Japan sprang a surprise on Oct. 31 by dramatically increasing the pace of its money creation, while European Central Bank President Mario Draghi yesterday shifted gear and threw the door wide open to quantitative easing in the euro zone.
China’s economic growth fell to a five-year low of 7.3 percent in the latest quarter and manufacturing and other indicators are declining.
That has prompted suggestions Beijing might intervene to prop up growth.
The People’s Bank of China said it acted to address “financing difficulties” caused by a shortage of credit. It also said the move was not a change in monetary policy and economic conditions are within an “appropriate range.”
The rate charged by banks for loans to each other rose this week to its highest level since early last month, reflecting reduced availability of credit, a concern for Chinese economic planners.
“If necessary, the central bank will provide timely liquidity support,” or extra credit to markets, it said in a separate statement.
The bank cut the rate on a one-year loan by commercial banks by 0.4 percentage points to 5.6 percent. The rate paid on one-year savings was lowered by 0.25 point to 2.75 percent.
It was the first rate cut since July 2012.
The move narrows the margin between savings and lending rates, giving more money to borrowers and savers by reducing the amount that goes to state-owned banks.
The Cabinet this week called for steps to reduce financing costs for industry as part of efforts to make the economy more efficient and productive.
Changes in interest rates have a limited direct effect on China’s government-dominated economy, but are seen as a signal to banks to lend more and to state companies that they are allowed to step up borrowing.
Yesterday’s rate cut is set to benefit state companies by reducing their borrowing costs. Most of China’s private companies cannot get loans from the state-owned banking industry and rely on an underground credit market.
“The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks,” Capital Economics chief Asia economist Mark Williams said in a report.
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