Massive rates cut a surprise to all

The central bank yesterday cut the benchmark interest rate by 1.08 percentage points, the highest in 11 years, to stimulate the economy battered by the global financial and other economic woes.

It also cut the proportion of money six big commercial banks have to hold as reserves by 1 percentage point to 16 percent. The cut in reserve requirement, which comes into effect from December 5, for the smaller banks is 2 percentage points to 14 percent.

The interest rate cut, which takes effect from today, is substantially larger than the previous three this year, 0.27 percentage points each, since mid-September.

After the cut, the one-year deposit interest rate will drop from 3.6 to 2.52 percent, and the one-year lending rate will fall from 6.66 to 5.58 percent, said a statement on the People's Bank of China (PBOC) website.

The authorities could cut the interest rate again this year if economic indicators in November show no signs of improvement, said Dong Xian'an, macro-economic analyst with China Southwest Securities. And it could be more than 0.27 of a percentage point.

The interest rate cut is the highest since October 1997 when the PBOC slashed the one-year borrowing cost by 1.44 percentage points to support growth and withstand the impact of the Asian financial crisis.

The move shows the central policymakers have decided to adopt forceful policies to protect the economy from any further harm, analysts said.

A rate cut was expected, but the size and timing was beyond expectation, said She Minhua, a China Securities analyst.

The market was expecting a 0.54-percentage-point cut and the central bank usually cuts rates over the weekend.

The high reduction rate shows senior officials have a more pessimistic view about the economic outlook, She said.

"Such a big cut indicates central policymakers have reached a consensus that the economy faces tough times ahead, and forceful measures are needed to help it through," said Zhang Xiaojing, director of the macro-economic research department of the Chinese Academy of Social Sciences.

"Thanks to such a consensus, the country's economic growth could be kept above 9 percent next year," said Li Jianwei, senior economist of the State Council's Development Research Center.

On Tuesday, the World Bank cut the country's growth rate for the next year from 9.2 percent to 7.5 percent, the lowest since 1990. Chinese exporters are feeling the pinch of the falling global demand, and many factories and plants have already been forced to close down. And the economy grew by only 9 percent in the third quarter of this year against 11.4 percent for the whole of last year.

But determined to overcome the global financial crisis, the government announced a $586-billion stimulus package on November 9 to increase domestic demand and insulate the economy from outside impact. The interest rate cut is another major step in that direction.

"China's GDP growth could stay above 9 percent - rather than the World Bank's forecast of 7.5 percent - next year if all the stimulus measures are carried out effectively," Li said.

Zhuang Jian, senior economist of the Asian Development Bank in Beijing, said: "If the nation's stimulus policies are implemented well, it should not be a problem for China to maintain an annual growth rate of 8 percent next year."

But many economists have forecast that the growth could be as low as 7 percent for the fourth quarter this year.

The several "tiny cuts" in interest rates earlier yielded limited results because the monetary policy is often not as effective if the economy is in a downturn, Zhang said. The exceptionally big cut this time, therefore, was necessary.

"There are signs that the economic growth could fall sharply in the fourth quarter," said Ma Ming, economist with the Beijing Institute of Technology. "If that happens, the policymakers could cut it again in December to help bail out the economy."

Questions:

1. Central policy makers cut interest rates by 1.08 percentage points, the highest in 11 years. What does this say about their view of the economy?

2. The World Bank on Tuesday cut China’s growth rate to what percent?

3. What did the government announce on November 9 to increase domestic demand?

Answers:

1. They are pessimistic and need to take more forceful measures to help China’s economy.

2. 7.5 percent.

3. A $856 billion stimulus package.