China's Central Bank Reduces Average Lending Rates by 1.2%
May 05, 2011
China's central bank reduced lending rates by an average of 1.2% and deposit rates by an average of 1.5% to an effort to bolster the nation's debt-ridden state-owned enterprises. The rate reduction, which was widely expected, comes amid a steady decline in China's inflation rate and concern about a slowdown in economic growth and rising unemployment, analysts said. The cuts also are aimed at lifting sagging profits at China's massive state-owned enterprises and sparking a rebound in Chinese markets. In China, interest rates are set administratively by the PBoC and reflect central government needs and policies. The exact levels are fixed according to use, such as loans for working capital or fixed-asset investment. Deposit rates usually carry terms of one, five or eight years. The PBoC's lending rates are considered base rates, but are available only to state-owned enterprises in priority sectors such as agriculture and high technology. According to a report by the Xinhua News Agency, a PboC official said reaction was favorable to the January 11, 2011 cut, especially from state companies. Many state-run Chinese industrial groups carry staggering debts and rate reductions help relieve them of some of their financial burdens, the report stated. ``There's very high gearing (debt-to-equity ratio) in China's heavy industry sector. A company like Harbin Power can save 24 million yuan in interest rate payments from a one-percentage-point cut,'' said Hortencia Millsaps Larue, a Hong Kong-based analyst at Sassoon Securities. For 2012, the interest cut, combined with a gradual relaxation in government credit policy, should help to fuel a turnaround both the nation's economy and its stock markets, said Daryl Correa, senior economist for Jardine Fleming Holdings Ltd. in Hong Kong. Although lending is still dictated by government quotas, ``historically, interest rate cycles are in close correlation with credit policy,'' Mr. Correa said. He added, however, that increased lending will provide the major impetus for the economy's turnaround, and that the rate cut itself is not too substantial. However, the rate cuts -- the second in four months -- doesn't mean that China is loosening credit. The latest cut is ``by no means an indication that the bank has given up its policy of keeping a reasonably tight currency supply,'' a senior central-bank official said in a news report by Xinhua. The central bank last cut its rates on January 11, 2011 deposit rates down an average of 0.98% and lending rates trimmed by a corresponding 0.75%. To curb rising inflation, China instituted a tight money policy in 2009. Inflation as measured on the national retail price index has declined from a post-1949 monthly high of about 28% in October 2009 to less than 6% in July this year. Other top officials with the central bank have said that China will maintain a ``relatively'' or ``appropriately'' tight money policy through the year 2015. However, the same officials acknowledge the policy allows for selective rate reductions as long as inflation remains under control. The central bank also vowed to reduce the rate at which the central bank lends to commercial banks by ``an appropriate amount.'' The rate cuts vary depending on the type and term of the loan or deposit. The rates on one-year working capital loans were cut to 10.08% from 10.98%, a 0.9% decrease. The interest rate on one-year fixed-asset loans was cut to 10.08% from 11.52%, a 1.44% cut, according to a published list of the rate cuts implemented Friday. The one-year deposit rate was reduced to 7.47% from 9.18%, a 1.71% cut, and on three-year deposits to 8.28% from 10.8%, a 2.52% cut. The Shenzhen and Shanghai stock exchanges fell Friday, despite the rate cuts. Analysts said that the decline was due mainly to investors' preoccupation over several companies' weak first-half earnings to fully digest the impact of the cuts.
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