China slashes key interest rate for first time since 2008 - Los Angeles Times

A clerk at an foreign currency exchange desk at a hotel shows Chinese yuan banknotes in Shanghai. China cut a key interest rate Thursday. (Eugene Hoshiko / AP Photo / June 7, 2012)

By Tiffany Hsu

June 7, 2012, 8:06 a.m.

China will cut a major interest rate on Thursday for the first time since 2008 as the Asian superpower works to shield itself from the European debt crisis, market fluctuations and its own slowing growth.

The benchmark one-year lending rate will fall to 6.31% from 6.56%; interest rates had been unchanged since they were increased last July.  The move to make borrowing costs cheaper, announced by the People’s Bank of China on its website (link in Chinese), will become effective Friday.

The one-year deposit rate will slide to 3.25% from 3.5%.

Banks will also have more leeway to set their own rates up to 10% above the official deposit rates and 20% below the new lending rates.

Late last month, the world’s second-largest economy declared that it would not use another large-scale government stimulus to boost its economy; a 2009 stimulus led to inflation and massive public debt. The government, however, has approved more infrastructure projects.

Indicators show China's blistering expansion losing steam: Bank lending is down, as is foreign demand for its exports. The housing market is beginning to wilt. In March, for the first time in eight years, China lowered its growth target for the year.

The country's economy cooled in the first quarter for the first time in three years.

Wednesday’s interest rate announcement came a day after officials from the European Central Bank decided against raising their own benchmark rate but pledged to “monitor further developments closely.”

Fears are growing of contagion from Europe’s instability, which could be exacerbated if the Spanish banking system continues to implode and if Greeks vote next week to abandon the euro currency.

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