China cuts rates for third time in six months

Beijing moved to shore up the slowing Chinese economy on Sunday night with its third interest rate cut in six months.

The People's Bank of China, the central bank, said it would cut the benchmark one year lending rate by 0.25 percentage point to 5.1 per cent, effective from Monday.

The one year benchmark deposit rate would be cut by the same amount to 2.25 per cent, the central bank said, adding that the deposit-rate ceiling would be expanded to 150 per cent of benchmark from 130 per cent.

In a statement on its website the bank said the move would support the healthy development of the economy. Economic indicators released in recent weeks have suggested a further loss of momentum in the second quarter

?"Currently, the pace of domestic economic restructuring is quickening and the fluctuation of external demand is relatively big. China's economy is still facing relatively big downward pressure," it added.

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"After the cut, the real lending rate may be lowered by another 20-25 basis points. Combined with the much lower interbank money market rate, this move should help lower real financing costs in the real economy," said Wang Tao, China chief economist at UBS.

"The main purpose of the rate cut is to lower the debt service burden of the real economy and improve the cash flow of corporate and local governments," she said, adding "It will have a very limited stimulative effect on growth. The former is very important though, given the debt overhang and deflationary pressure."

??Many economic analysts believe the central bank may not be finished with introducing easing measures, having cut interest rates and relaxed banks' reserve requirements five times in the past six months.

?<>"Today's statement clearly suggests that further policy easing is highly likely if growth remains soft?," said Liu Li-Gang and Zhou Hao? of ANZ. "China's trade and inflation figures came in weaker than expected in April, suggesting that the economy still faces strong downward pressure. We believe that the activity data could also remain sluggish in April, increasing the risk that the GDP growth will likely miss 7 per cent in the second quarter of 2015."? ?

An economic slowdown in China is widely seen as inevitable but also necessary as the country tries to rebalance its growth model, moving from a traditional dependence on smokestack industries towards domestic consumption and services.

However, policy makers want to avoid an abrupt slowdown that could cause unemployment to spike and trigger a wave of defaults that could threaten financial stability.

Additional reporting by Jackie Cai

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