China's central bank cuts interest rates

The People's Bank of China (PBOC), China's central bank, Friday announced the first interest rate cuts in more than two years.

INTEREST RATE CUT

The PBOC cut the benchmark rate for one-year deposits by 25 basis points and the one-year lending rate by 40 basis points from Saturday. This is the first adjustment to the benchmark rates since July 2012.

After the cut, one-year deposit rate will stand at 2.75 percent, while one-year lending will be at 5.6 percent.

The intention is to lower market interest rates and private financing costs to help alleviate problems facing many enterprises, the central bank said in a separate statement after the interest rate announcement.

DOWNWARD PRESSURE

The move comes as the economy is under pressure with GDP expanding by 7.3 percent year on year in Q3, compared with 7.5 percent in Q2 and 7.4 percent in Q1.

Q3 growth was the slowest quarterly growth since Q1, 2009.

"The Chinese economy is running within the proper range and positive signs have emerged in economic restructuring. However, high financing costs and obstructions still remain prominent problems for the real economy," said the central bank.

"Reducing high financing costs for enterprises, small and micro-firms in particular, is of great importance to stabilizing economic growth, job creation and the benefit of the people," noted the statement.

After several attempts to tackle high financing costs since in July, things have eased in some regions, but companies still face operational difficulties, and some, especially smaller firms, are more vulnerable to high costs than others, said the central bank.

The decision to cut borrowing and lending rates came two days after State Council measures to ease financial burdens on companies, including speeding up the growth of private banks.

The rate cuts will lower financing costs, especially for small and micro-enterprises and the agricultural sector, said Lu Zhengwei, chief economist with Industrial Bank Co., Ltd.

NO CHANGE IN MONETARY STANCE

The cuts should not be interpreted as a shift from "prudent monetary policy", said the PBOC, but will add flexibility to interest rate instruments to fine-tune in line with economic developments.

As the economy is still growing at a healthy rate with industrial upgrades underway, growth is more reliant on innovation than investment, "there is no need for strong stimulus," said the central bank.

The key to complicated international and domestic situations and supporting long-term stable economic growth is development vitality through domestic reform, said the PBOC.

The PBOC also lifted the upper limit of the floating band of deposit rates to 1.2 times the benchmark from the existing 1.1 times announced in June 2012, a big step in interest rate reform.

Until June 2012, China's commercial banks were generally not allowed to offer deposits rates higher than the benchmark.

This move not only gives a bigger role to market mechanisms in interest rate formation, but is also a step toward full liberalization of deposit rates in the future, said the central bank.