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China cuts interest rates to bolster real economy

Updated: May 11,2015 10:20 AM     Xinhua

BEIJING — The central bank announced on May 10 an interest rates cut starting May 11, the third time since November last year, to bolster the real economy.

The People’s Bank of China (PBOC) will cut the benchmark deposit and loan interest rates by 25 basis points (bps). After the cut, the one-year deposit rate will stand at 2.25 percent, and the one-year lending rate at 5.1 percent.

This is the third round of rate cuts by the PBOC following one in November 2014 and another in March 2015.

The cuts will lower funding costs to facilitate healthy development of the real economy and ensure a modest monetary environment amid the ongoing strategy of national economic restructuring, the PBOC said.

Ma Jun, chief economist with the research bureau of the PBOC, said the interest rate cuts should not be interpreted as the Chinese version of quantitative easing (QE).

QE, adopted in some developed countries, is a set of unconventional policy measures when the policy rates are close to zero and the real economy faces recession, but this is not what is happening in China as the central bank still has many conventional tools to pump liquidity, Ma said.

China’s economy now faces grave downward pressure and it is necessary to cut actual interest rates and stabilize investment growth through reducing nominal interest rates. If nominal interest rates were not cut while inflation was dropping, real interest rates will climb with risks of passive contraction in monetary conditions, Ma said.

The cut was in line with market expectation of pro-growth monetary measures after a string of indicators, including manufacturing activity and foreign trade, suggested the world’s second largest economy confronted a rocky ride on its reform drive.

Given looming downward pressure and deflationary risks, the cut, a wise move, responds to the economic circumstance and will serve as a boon to lowering financing costs, said Qu Hongbin, chief economist for China at HSBC.

To further boost interest rate liberalization, the central bank also decided to adjust the upper limit of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times.

This is another key move for deposit interest rate reforms, paving the way for the ultimate lifting of ceiling control on deposit interest rates, said the PBOC.

The move can widen the pricing freedom of the financial institutions and improve their independent capacities in fixing prices, the PBOC said.

While economic reform accelerates, China still faces relatively high downward pressure as external demand continues to fluctuate, the PBOC said.

China’s economy, under the “new normal” of slower growth and higher quality, expanded 7 percent in the first quarter from a year earlier, the lowest quarterly growth posted since 2009.

Besides the rate cuts, the central bank also slashed the reserve requirement ratio in February and again in April to alleviate the financing burden on enterprises and bolster the economy.

China’s low inflationary level and high real interest rates provide ample room to adopt such tools, the PBOC said.

The PBOC said it would continue to implement prudent monetary policies and make moderate adjustments based on changes in liquidity, inflation and economic situation, striking a policy balance between economic restructuring and growth.