China Cuts Interest Rates - Wall Street Journal

By AARON BACK

BEIJINGâ€"China's central bank moved aggressively to support growth Thursday, lowering interest rates at a time investor confidence has been strained by a deepening debt crisis in the euro zone and signs the U.S. recovery is fading.

The People's Bank of China said in a statement on its website it will lower benchmark one-year lending and deposit rates by 0.25 percentage point, effective from Friday.

It also will begin allowing deposit rates to float higher and lending rates to float lower than under current regulations. In effect, maximum deposit rates will rise slightly after the changes, and minimum lending rates will fall sharply.

Dariusz Kowalczyk, an economist with Credit Agricole, said the move signals that "policy makers bringing out the big guns to support growth."

"The biggest impact of the move is likely to be on sentiment, both among businesses and consumers domestically, and in the markets," he said in a note.

The one-year benchmark lending rate will fall to 6.31% from 6.56%, and the one-year benchmark deposit rate to 3.25% from 3.50%.

In addition, the PBOC will allow deposit rates to rise to 110% of the benchmark rate, and the lending rate to fall to 80% of the benchmark.

Currently, deposit rates are not allowed to rise above the benchmark deposit rate, while lending rates are allowed to go down to 90% of the benchmark lending rate.

The changes effectively mean that the maximum deposit rate will rise to 3.58% from 3.50% earlier, while the minimum lending rate will fall to 5.05% from 5.90%.

HSBC economist Ma Xiaoping said the rate cut could trigger a rebound in bank lending this month. Bank loans have been sluggish due to lower demand from borrowers.

But she added that the change to the interest rate bands "will have a much more significant impact" as it is the first step toward interest-rate liberalization, which "is at the heart of the financial reform agenda."

The Australian dollar, which is highly sensitive to China's demand for raw materials, jumped to the day's high against the dollar after the move was announced. The currency added some 0.3% gains against the greenback to $0.9992 from $0.9967.

As deposit rates float higher and lending rates lower, bank profit margins will be squeezed, but this will provide them with an incentive to innovate their business models, HSBC's Ms. Ma added.

The PBOC had raised rates three times in 2011, with the last hike announced July 6. It raised rates twice in 2010.

Write to Aaron Back at aaron.back@dowjones.com