China Cuts Interest Rates for Third Time in 2 Months (Update2)

Oct. 29 (Bloomberg) — China cut interest rates for the third time in two months to stimulate growth in the world’s fourth-largest economy after the global financial crisis curbed exports and production.

The key one-year lending rate will drop to 6.66 percent from 6.93 percent, the People’s Bank of China said on its Web site today. The deposit rate will fall to 3.60 percent from 3.87 percent. The changes are effective tomorrow.

China’s expansion dwindled to 9 percent in the third quarter from 11.9 percent in 2007 and industrial production grew at the slowest pace in six years in September as export markets dried up. The Federal Reserve may reduce its benchmark rate today and the European Central Bank has signaled that it’s poised for a similar move.

“This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “It isn’t likely to have an immediate impact on China’s economy; what’s needed is more government spending.”

Economic growth has slowed for five straight quarters. Signs of weakness span property, industrial production, export orders, and the 69 percent fall in the CSI 300 Index of stocks this year.

The rate cut “shows that the government is pulling out all the stops to make sure that the gentle economic slowdown seen so far doesn’t turn into something more serious,” said Mark Williams, an economist at Capital Economics Ltd. in London.

Plunging Home Sales

Export orders dropped in the third quarter to the lowest level since 2005. Home sales plunged 55.5 percent in Beijing and 38.5 percent in Shanghai in the first eight months from a year earlier, according to the official Xinhua News Agency.

Sustaining growth is the government’s “first priority,” Premier Wen Jiabao said Oct. 25.

The government has raised export-tax rebates, cut costs for home buyers and pledged infrastructure spending to protect jobs and stimulate growth.

A global slowdown is curbing demand for Chinese goods. The International Monetary Fund estimates that advanced economies will expand 0.5 percent next year, the slowest pace since 1982.

Lehman Brothers

China cut borrowing costs for the first time in six years on Sept. 15, the day U.S. investment bank Lehman Brothers Holdings Inc. filed for bankruptcy. It followed up with another reduction on Oct. 8 as the U.S. Federal Reserve and five other central banks made emergency coordinated reductions to counter the financial crisis.

Both cuts were accompanied by reductions in the proportion of money that banks must set aside as reserves. The central bank didn’t reduce reserve requirements today.

The People’s Bank of China has stalled gains by the yuan against the dollar since mid-July and eased annual quotas that limit lending by banks, to protect jobs and stimulate growth.

The central bank ratcheted up interest rates when the government was trying to stop the economy from overheating.

China shifted emphasis from fighting inflation to sustaining growth in July, when the Communist Party’s top decision-making body, the Politburo, dropped any reference to a “tight” monetary policy. Consumer-price increases have slowed after reaching the fastest pace in 12 years in February.

“Beijing’s shift to focusing on inadequate economic growth, rather than on excessive inflation, in July 2008 was the right call on their part,” said Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets.

Capital controls, a world record $1.9 trillion of currency reserves, and a fiscal surplus will help to buffer China against the financial crisis. The nation’s growth, the fastest of the world’s 20 biggest economies, underpins demand for the exports of its Asian neighbors and commodities from iron ore to soybeans.

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