China cuts interest rates to spur growth, ease debt pressure

Fri Nov 21, 2014 1:24pm EST
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By Koh Gui Qing and Jason Subler

BEIJING (Reuters) - China cut interest rates unexpectedly on Friday, stepping up efforts to support the world's second-biggest economy as it heads toward its slowest expansion in nearly a quarter of a century, saddled under a mountain of debt.

But the central bank, keen to show it was not back-tracking on economic reforms, twinned the move with a slight liberalization of the rates banks pay to borrowers in a bid to ensure millions of savers do not see their incomes hit.

Beijing's first rate cut in more than two years comes as factory growth stalls and the property market, long a pillar of growth, is weak, dragging on broader activity and curbing demand for everything from furniture to cement and steel.

Many companies have also been struggling with debt, as slowing sales crimp their ability to pay back loans racked up in a nationwide frenzy of borrowing from 2008-2010 when Beijing used economic stimulus to offset the effects of the global financial crisis.

"It will obviously reduce financing pressures for bank borrowers. Typically those are larger companies, state-owned companies, so they're the main beneficiaries of this," said Mark Williams, chief Asia economist at Capital Economics in London.

The People's Bank of China (PBOC) said it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent. It lowered one-year benchmark deposit rates by 25 basis points to 2.75 percent. The changes take effect from Saturday.

European shares and other growth-sensitive commodities all leapt as China's move to cut rates gave markets a welcome lift after a week where data has shown its giant economy faltering.

While the move acknowledged the risks to growth and marks a stepped-up effort to ensure the economy stays on track even as it is expected to slow to a 24-year low of 7.4 percent this year, the central bank took pains to signal that it was not simply moving toward a looser monetary stance.   Continued...

The headquarters of China's central bank, the People's Bank of China, is pictured behind an iron chain in Beijing, June 21, 2013.   REUTERS/Jason Lee