Reduction may see moves to shield economy from fallout

By Leo Zhang  |   2008-10-31  |     NEWSPAPER EDITION

CHINA'S latest interest rate cuts may herald a series of state-led measures to shield the domestic economy from being severely impacted by the worsening financial market fallout and slower global economic growth, economists said.

But a loosening in monetary policies won't immediately give a shot in the arm to the sagging mainland stock market and won't reverse declining corporate profit margins this year and the next, they said.

The People's Bank of China on late Wednesday announced its third rate cut in six weeks, joining the United States in the fight against the global financial turmoil in a bid to avoid a deeper economic recession.

The central bank lowered both the benchmark one-year deposit and lending rates by 0.27 percentage point. It also made a bigger cut in the long-term savings rate than in the short-term savings and lending rates.

"The pattern of the rate cuts showed that the government's concerns about long-term inflation are easing," said Zhu Jianfang, an economist with CITIC Securities Co. "But expansionary policies can't swiftly change the macroeconomic downtrend and corporate fundamentals will stay weak."

China for the first time joined major global economies on October 8 to cut interest rates. Yesterday's move was followed by a half-percentage-point cut by the US Federal Reserve on its benchmark overnight rates.

"The rate cuts by the Chinese central bank seemed a bit late and not that big," said Wu Zhiguo, a Guohai Securities Co analyst. "China should loosen monetary policies more quickly to prevent a severe impact to the economy."

Wu said he had expected a reduction of 54 basis points and suggested the central bank also reduce banks' reserve requirement ratio to free up more capital for lending. China on October 8 cut the ratio, or the portion of money commercial banks must park at the central bank and not lend, by 0.5 percentage point to 16 percent.