China cuts interest rates to spur growth

11 May 2015

China's central bank People's Bank of China (PBOC), has cut key interest rates for the third time in six months to boost economic growth in the world's second-largest economy which is struggling to recover from the slowest annual growth in over two decades.

The PBOC reduced the benchmark interest rates by 25 basis points to 5.1 per cent, and also lowered the one-year deposit rates by the same amount to 2.25 per cent with effect from 11 May, saying that the action will support healthy growth of the nation's economy.

China's economy registered a 7.4-per cent growth in 2014, its lowest pace in 24 years with economists further predicting an even lower 7-per cent expansion this year despite the government's stimulus measures.

The growth is weighed down by the slump in property market, high levels of local government debt and slackening manufacturing activity.

In the first quarter, the Chinese economy posted its slowest growth in 6 years at 7 per cent, and according to a top government think tank, the second quarter is likely to see a further slowdown to 6.8 per cent. (See: China's economy set to slow to 6.8 per cent in Q2)

An HSBC/Markit survey a fortnight ago indicated that the purchasing managers index (PMI) fell to 49.2 in April, which was below the 50-mark and the fastest pace in a year, signaling a contraction in domestic demand.

On Friday, in its policy report for the first quarter, the central bank vowed it will not resort to quantitative easing to inject liquidity into the market further saying that ''greater attention will be paid to anticipatory adjustment and fine-tuning.''

The bank said it will use monetary policy tools to manage liquidity in the market and adjust its policy in line with supply and demand for liquidity, inflationary pressure and economic development.

According to analysts, China can cut interest rates and reduce the reserve requirement ratio (RRR), the amount of cash banks needed to keep as reserves, as its fine tuning measures.

In the last six months, PBOC has cut interest rates and reserve ratio five times to combat slowing growth.

"Currently, the pace of domestic economic restructuring is quickening and the fluctuation of external demand is relatively big. China's economy is still facing relatively big downward pressure," PBOC said.

The central bank said it will guard against risk of excess liquidity which could exacerbate economic distortions and increase debt and leverage in the world's second-largest economy.

Some economists believe that Chinese slowdown is inevitable and will continue to be a key feature of global economy which could last for several years affecting the rest of the world.

Despite the 2014 slowdown, the nation's economy has entered the elite group of plus $10 trillion economies, a feat achieved by earlier only by the US.

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