China cuts benchmark interest rates

Soon after interest rates were cut by the US Federal Reserve on Wednesday, the People's Bank of China announced that it will slash benchmark deposits and lending rates by 0.27 percentage point.

The central bank will also slash the reserve requirement ratio for banks by half a percentage point beginning October 15, China Daily reported.

The crisis in the world's financial markets is expected to cut into world growth. Analysts say that cutting interest rates will help prevent economic growth from declining due to reduced demand for Chinese exports.

From today, interest rates for one-year bank loans will fall to 6.93 percent from 7.20 percent, while the benchmark one-year deposit rate falls to 3.87 percent from 4.14 percent, China Daily said.

The State Council said it would also scrap a 5 percent individual income tax on interest on savings beginning today in the hope that this boosts domestic demand.

According to Bloomberg, the Chinese cuts underline how deeply China has become part of the world economy. While China posted GDP growth rates of 10.1 percent in the second quarter, its export sector has been hit by reduced demand from the US and Europe.

The paper said China has already taken some measures to help it weather the crisis – the central bank has eased quotas limiting how much banks can lend, slowed the appreciation of the yuan against the dollar to help protect jobs as well as raised export-tax rebate for garments and textiles.

Premier Wen Jiabao said on September 27 that China wants to participate in finding a global solution to the financial crisis, urging all countries to take “proactive measures.”

“China's participation in this seemingly coordinated rate cut is encouraging given its importance to the global economy,” Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong, was quoted by Bloomberg as saying. “China is becoming more responsible as an involved stakeholder.”

China holds about 519 billion USD (377.8 billion euros) of US Treasury bills, making it the second largest foreign lender to the US, after Japan.

1 USD = 0.727 euros