China Cuts Interest Rate by 25 Basis Points

China's central bank
China's central bank


China lowered benchmark interest rates on loans and deposits, and moved to allow rates to float more freely to create more spending and prevent a further contraction in the Chinese economy. It is the first rate cut since 2008 when China saw a jump in unemployment and experienced negative fallout from weak global demand.

China’s central bank cut the one year deposit rate 25 basis points to 3.25% and cuts one year lending rate 25 basis points to 6.31%. The central bank also widened the discount band to 20% from 10%.

China’s quarterly GDP has steadily moved lower in recent quarters. The GDP target for 2012 is 7.5%, sharply lower than the 8.9% GDP level for 2011. First quarter 2012 GDP was 8.1%.

 HSBC announced earlier this month showed that Chinese manufacturing retracted in May for the seventh consecutive month. The manufacturing index fell to 48.4 in May from 49.3 in April. A reading of above 50 indicates growth in manufacturing.

Global weakness in Europe, North America, and other emerging market are taking a toll on China’s economic output  along with some recent declines in China’s real estate market. Economists are split about whether China will experience a soft or hard landing with their economy. 

Chinese leaders are determined to lower their reliance on exporting and capital spending in favor of consumption within the growing Chinese economy that has witnessed a steady rise in the middle class. 

Beijing is aiming for inflation around 4 percent this year which is in line with their 2011 inflation goal. High inflation has caused political tension in China in the past.

The modest interest rate cut today of 25 basis points signals that liberalization is occurring within the China’s economy in a bid to make the Chinese economy more robust and business friendly in 2012.

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