China Announces Steep Rate Cut

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Nov. 27 – China’s central bank has announced that one-year lending and deposit rates will be reduced on Thursday by 108 basis points; four times the usual margin of 27 basis points.

This is the country’s deepest rate cut since October 1997. One-year lending rates in the country will now be pegged at 5.58 percent and one-year deposit rates at 2.52 percent.

The government has been aggressive in implementing measures to buffer its economy from the global financial crisis. The latest interest rate cut is its fourth one since mid-September. “It means the government is moving on more fronts to stimulate growth,” Stephen Green, a Shanghai-based economist with Standard Chartered told AFP.

Only this month, China said it would release a RMB4 trillion stimulus package to lift the economy through more infrastructure development.

“The economic situation now is even worse than in 1998,” Xing Zhiqiang, a Beijing-based analyst with China International Capital Corporation, told AFP.

He added, “The bubbles in international commodity prices have burst and the prices of many raw materials are falling.”

“China’s trying to draw a line under unemployment and civil unrest,” Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong told Bloomberg. “It’s the most challenging set of circumstances Beijing has had to face since late 1989 that culminated in the protests in Tiananmen Square.”

China will need to maintain at least 8 percent economic growth to be able to provide jobs for migrant workers coming from the countryside and a decline to even that level would be tantamount to a recession, Tao Dong, chief Asia economist with Credit Suisse AG told Bloomberg.

The latest tax rate cuts mean that borrowing money from the bank is now cheap because inflation rate for October was at 4 percent. Moreover, just parking money in the bank is another way of losing its value considering that real interest rate is defined as the deposit rate minus inflation.