China cuts rates, fuel price in new stimulus moves

AP News
Posted: Jun 08, 2012 7:10 AM
China cuts rates, fuel price in new stimulus moves

China cut state-set gasoline and diesel prices for the second time in a month on Friday amid mounting government efforts to reverse a sharp slowdown in the world's second-largest economy.

The reduction in fuel prices followed an interest rate cut on Thursday, which was the first in almost four years, and a small but significant step toward letting the market set rates paid on bank deposits.

The fuel price cut will reduce retail costs of the mostly commonly used grade of gasoline by over 5 percent. Diesel prices will be cut by a similar amount, effective Saturday.

The central bank's rate cut was the first since 2008 and came as Chinese leaders are reversing course after tightening controls for two years to cool an overheated economy. Beijing also announced that it will for the first time allow banks to pay deposit rates higher than the state-mandated level. That might help to shift money to households and boost consumer spending.

The slowdown in the world's second-largest economy raises the risk of job losses and unrest, making it politically dangerous for the ruling Communist Party. It is trying to enforce calm ahead of a once-a-decade handover of power to younger leaders.

Analysts suggested authorities were spurred to greater urgency by May trade and industrial data due out this weekend that might be even weaker than pessimistic forecasts expected.

"Markets are bracing for a potentially bad set of May economic data," said Moody's Analytics economist Alaistair Chan in a report.

Beijing is unveiling new measures almost daily to shore up growth that slowed to 8.1 percent in the first quarter and is expected to decline further. It plans to pump money into the economy through more spending on construction of airports and other public works and to encourage corporate investment.

The central bank cut the rate on a one-year loan by a quarter percentage point to 6.31 percent effective Friday. It was the first rate cut since November 2008.

"The rate cut could help to alleviate the financial burdens of firms and boost demand for loans," said Goldman Sachs economist Yu Song in a report.

The government has also approved a multibillion-dollar wave of major investments by state companies.

However, communist leaders are moving cautiously after their huge stimulus in response to the 2008 financial crisis fueled inflation and a wasteful building boom.

The price of the most commonly used grade of gasoline will be cut by 0.43 yuan (7 U.S. cents) per liter, according to the country's planning agency, the National Development and Reform Commission.

That would be a reduction of just over 5 percent in Beijing, which has some of China's highest prices, to 7.64 yuan ($1.21) per liter. Other areas with lower pump prices would get a bigger cut in percentage terms.

The looser controls on deposit rates might prompt banks to raise rates to the official cap as they compete to attract and keep depositors, analysts said.

"This too should help stimulus efforts," said Qinwei Wang and Mark Williams of Capital Economics.

The controls have given Chinese banks a margin between lending and deposit rates of more than 3 percent _ among the world's largest _ and guaranteed them fat profits.

Profits for China's banks are equal to more than 3 percent of gross domestic product, the highest rate for any major economy and well above Japan's 0.6 percent and Australia's 2.7 percent, according to Citigroup analyst Simon Ho.

This week's change should narrow banks' interest rate margin by 0.19 percentage point, according to Deutschebank's Jun Ma.

Also Thursday, the central bank expanded flexibility for banks in rates they can charge borrowers. The minimum rate for commercial loans was lowered to 0.8 times the benchmark from the previous level of 0.9 percent.

More than 70 percent of bank loans already are charged at rates above the benchmark, according to J.P. Morgan. That could help to cushion the impact of easing controls on deposit rates because banks effectively already have wider margins on those loans.

"Many harbour doubts about the wisdom of another credit-fuelled stimulus," said Wang and Williams of Capital Economics, "but the government's overriding objective is now to ensure that the economy is not too fragile in the final months before the once-in-a-decade leadership transition."


National Development and Reform Commission: