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 The cut, the first in over two years, came as factory growth has
stalled and the property market, long a pillar of growth, has
remained weak, dragging on broader activity and curbing demand for
everything from furniture to cement and steel.
"It's comes right after China's disappointing PMI figures showing
that manufacturing activity is getting dangerously close to
contraction," said Alexandre Baradez, chief market analyst at IG in
Paris, referring to a private factory survey this week which added
to worries about slowing global growth.
"China's central bank is now following the path of the Fed, the ECB
and the BoJ. Central banks are really driving markets," he said.
Just a few weeks ago, Chinese President Xi Jinping had assured
global business leaders that the risks faced by China's economy were
"not so scary" and the government was confident it could head off
the dangers.
In a speech to chief executives at the Asia Pacific Economic
Cooperation (APEC) CEO Summit, Xi said even if China's economy were
to grow 7 percent, that would still rank it at the forefront of the
world's economies.
The People's Bank of China 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 less - just 25 basis points. The changes
take effect from Saturday.
"The problem of difficult financing, costly financing remains
glaring in the real economy," the PBOC said.
LIMITING THE IMPACT
The central bank also took a step to free up deposit rates, allowing
banks to pay depositors 1.2 times the benchmark level, up from 1.1
times previously.
"They are cutting rates and liberalising rates at the same time so
that the stimulus won't be so damaging," said Li Huiyong, an
economist at Shenyin and Wanguo Securities.
Recent data showed bank lending tumbled in October and money supply
growth cooled, raising fears of a sharper economic slowdown and
prompting calls for more stimulus measures, including cutting
interest rates.
But many analysts had expected the central bank to hold off on
cutting interest rates for now, as authorities have opted instead
for measures like more fiscal spending, as they also try to balance
the need to reform the economy.
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Chinese leaders have also repeatedly stressed they would tolerate
somewhat slower growth as long as the jobs market remained
resilient.
More recently, the central bank injected cash into the system in the
form of short-term loans to banks in an attempt to keep down
borrowing costs and encourage more lending even as bad loans
increase.
But a growing number of economists said those moves were not
translating into either lower financing costs or more credit for
cash-starved Chinese companies.
Analysts expressed doubts over whether the impact of the rate cut
would find its way into the real economy, either, as the cooling
economy makes lenders more risk-averse. Some predicted multiple cuts
would be needed well into next year.
Hurt by the cooling property sector, erratic export demand and
slackening domestic investment growth, China's economy is seen
posting its weakest annual growth in 24 years this year at 7.4
percent.
China's rate move comes after the Bank of Japan sprang a surprise on
Oct. 31 by dramatically increasing the pace of its money creation,
while European Central Bank President Mario Draghi shifted gear on
Friday and threw the door wide open to quantitative easing in the
euro zone.
"There is definitely more concern around about the state of the
global economy than there was a few months ago, you see that not
just when you talk about Europe," British finance minister George
Osborne told an audience of business leaders in London on Friday.
(Additional reporting by Jake Spring; Editing by Jacqueline Wong,
Kim Coghill and Mike Collett-White)
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