Central bank further cuts interest rates

Move doesn't signal shift in finance policy

China's central bank has moved to reassure the market with an announcement over the weekend of a second consecutive interest rate cut in just over three months.

Starting from Sunday, the one-year benchmark lending rate will be cut by 25 basis points to 5.35 percent, while the one-year benchmark interest rate on deposits will fall by the same amount to 2.5 percent, the People's Bank of China (PBC), the country's central bank, said Saturday in a statement on its website. The move makes it cheaper to borrow money.

The central bank has also given banks greater flexibility on deposit interest rates, raising the ceiling on deposit rates that financial institutions can offer to 1.3 times the benchmark from the previous 1.2 times.

Stating that the move doesn't signify a shift in its prudent monetary policy, PBC said in an accompanying statement released on Saturday that "the rate adjustment's primary purpose is to continue allowing benchmark interest rates to guide market rates, further consolidate achievements in lowering social financing costs, and create a neutral, moderate monetary and financial environment for the economy's restructuring and transition."

The PBC cut interest rates again in light of a moderate inflation rate and a sharp fall in producer prices in recent months which have pushed up real interest rates.

Before the Saturday announcement, the PBC announced a reduction in reserve requirements on February 4 for the first time since May 2012. It also announced a rate cut on November 21, 2014, the first in over two years.

The latest rate cut is seen as an attempt to stimulate a cooling Chinese economy.

Entering a "new normal" of slower yet higher quality growth, the 2015 growth target, set to be announced Thursday in Premier Li Keqiang's government work report to the annual parliamentary session, is generally expected to be below last year's 7.5 percent.

The latest announcement dovetails the effects of the last rate cut in November to help steady economic growth, Bank of Communications economists told the Global Times in a note shortly after the PBC decision was made available.

Lending rates have been declining since the November rate cut and the high cost of financing has been relieved to some extent, the central bank said in its statement.

Lowered lending costs would provide a boost for the cooling property market, arresting a slowdown in the economy, Xu Gao, the Beijing-based chief economist at China Everbright Securities, told the Global Times on Sunday.

The property sector, the stability of which is cited by many as being important to overall economic growth, continues to fall.

Average new home prices across the country's 100 major cities recorded a 0.24 percent drop in February compared to the previous month, reversing a gain of 0.21 in January, a survey by the China Real Estate Index System revealed over the weekend, attributing the fall to shrinking demand for homes during the weeklong Lunar New Year holidays.

On a yearly basis, the February data showed a steeper decline in average new home prices, from a 3.09 percent fall in January to a drop of 3.84 percent in February.

But concerns still remain over the actual effects of benchmark interest rate cuts, as bank loans have long been less accessible to smaller firms, analysts said.

"Policymakers would change [their strategy] and allow a rebound in credit growth if they believe that economic activity was weakening abruptly," Mark Williams, the chief Asia economist with Capital Economics in London, wrote in an e-mail to the Global Times.

He, however, shrugged off fears of a moderate slowdown in GDP growth, citing the stabilizer of strong wage growth and employment.

In a sign of life in the world's second largest economy, the official Purchasing Managers' Index for manufacturing released by the National Bureau of Statistics on Sunday rose slightly to 49.9 in February from the previous month's 49.8, ending a decline of four consecutive months.

But it's a second consecutive monthly reading below 50, which indicates a contraction.

However, it shows manufacturing activity is beginning to stabilize, Xu added.