Rate cut aims to boost domestic economy
( 2002-02-21 09:51 ) (1 )

China slashed interest rates by 0.25 percentage points on Wednesday in a bid to breathe new life into the economy.

It was the eighth fall in interests announced by the People's Bank of China, the central bank, since May 1996.

According to the central bank, the annual interest rate of current account deposits is lowered from 0.99 per cent to 0.72 per cent as of today, and that of one-year fixed-term deposits is lowered from 2.25 per cent to 1.98 per cent.

The annual interest rate of various loans is lowered by an average of 0.5 percentage points. The interest rates for deposited reserves by financial institutions in the central bank is lowered from 2.07 per cent to 1.89 per cent.

"The latest interest rate cut suggests the central bank is relaxing its 'sound' monetary policy to deal with the present economic slowdown," said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences.

Figures from the National Bureau of Statistics reveal the Chinese economy grew 8.1 per cent in the first quarter of last year, 7.8 per cent in the second quarter, 7 per cent in the third quarter and 6.5 per cent in the fourth quarter.

The implementation of the "sound" monetary policy was mainly because of worries that inflation may occur and the country's financial system may be unsafe.

These fears stem from the big amount of non-performing loans and the fierce competition from foreign banks following China's accession to the World Trade Organization, said Niu Li, a senior economist with the State Information Centre.

But figures from the National Bureau of Statistics show that the consumer price index, a key inflation gauge, dropped 0.3 per cent last December compared with the same month of 2000.

The decrease follows a drop of 0.3 per cent in November and a decline of 0.1 per cent in September.

"This is a dangerous warning," Niu said. "If the situation continues, China will suffer deflation."

Monetary policy, whose effects are weaker than that of the country's pro-active fiscal policy in stimulating domestic demand, should play a role in backing economic development, Niu said.

"The interest rate cut is a wise choice, although the impact will be very limited," Yuan said.

He added the rate cut would at least send a piece of good news to the country's sluggish stock markets.

The interest rate cut will also help ease the pressure of renminbi appreciation, which will harm the country's exports already decreasing because of the slowdown in the global economy, Yuan said.