Rates cut again to spur growth

The central bank has cut interest rates for a second time in less than three weeks to bolster¹ economic growth in the face of a worsening global financial crisis.

The benchmark one-year lending rate dropped to 6.66 percent from 6.93 percent, while the one-year deposit rate was lowered to 3.60 percent from 3.87 percent.

The revisions will come into effect today, the People's Bank of China said on its website last night.

"The drastic economic slowdown during the past months is clearly crying out for more policy boosts and the move comes as the downside risk looms² larger," said Zhang Xiaojing, an economist³ with the Chinese Academy of Social Sciences.

Weaker overseas demand and a slump⁴ in real estate have combined to slow the economy this year. GDP growth dropped to 9 percent for the third quarter, the first time it fell below double digits⁵ in five years.

The export sector⁶, a major driver of growth, has been the biggest victim of the global economic slowdown. In the first three quarters, exports grew 22.3 percent, 4.8 percentage points lower than the same period last year. Analysts⁷ warn that if the global economy weakens further, export growth might dip into negative territory next year.

"The rate cut is part of concerted efforts by global central banks to stabilize⁸ the financial market," said Cao Yuanzheng, chief economist at Bank of China International. "They need to do so to restore confidence in the global economy."

Last night the US Federal Reserve was widely expected to cut interest rates with the European Central Bank and the Bank of Japan tipped to follow suit.

Although China's banking⁹ sector has largely remained unscathed by the global credit crisis, the gloomy prospects¹⁰ of a slowing world economy appear to have dampened investor¹¹ and consumer confidence at home.

"The government will put more emphasis on spurring domestic demand in the coming months," said Zhang, adding that the effect of the monetary¹² policy is usually limited during a slowdown.

Earlier on September 16, the central bank cut the cost of bank loans by 0.27 of a percentage point, the first time since 2002, and lowered the proportion of money lenders must have as reserves by 1 percentage point, the first such move in nine years, to keep the economy from sliding further.

On October 8, it cut both deposit and lending rates by 0.27 of a percentage point and, from October 15, reduced the banks' reserve-requirement ratio by 0.5 of a percentage point after some local banks were reportedly reluctant to make new loans.

The government has also raised tax rebates¹³ for more than one-third of its export portfolio¹⁴, trying to provide relief to the manufacturers reliant on overseas demand. It also said it would increase spending on infrastructure¹⁵ projects, while introducing tax exemptions¹⁶ and reducing down payments to boost the falling real estate sector.

Questions:

1. What is the GDP growth in the third quarter this year?

2. Why do analysts worry if the global economy weakens further?

3. How is the government trying to stimulate¹⁷ the domestic economy?

Answers:

1. 9 percent.

2. Export growth might dip into negative territory next year.

3. Lowering deposit and lending rates, raise tax rebates on some exports, increase spending on infrastructure, and introduce tax exemptions and reduce down payments in the real estate sector.