China's central bank on Wednesday announced cuts in both the interest rate and reserve-requirement ratio in the latest effort to boost the domestic economy amid worries over the deepening global financial crisis.
China cuts interest rate, reserve requirement ratio for commercial banks
The deposit and lending rates would be lowered by 0.27 percentage points from Thursday and the reserve-requirement ratio by 0.5 percentage points from Oct. 15, the People's Bank of China (PBOC) said.
The loosening in monetary policy, the second such move in less than a month, highlighted the government's rising concern over the slowing economy and slumping capital market.
The PBOC cut the benchmark one year lending rate by 0.27 percentage points on Sept. 16, the first rate cut in six years. It also lowered the reserve requirement at medium- and small-sized lenders by 1 percentage point as of Sept. 25.
Tang Min, China Development Research Foundation deputy secretary, said the government made the move mainly out of concerns over domestic problems.
"The deepening U.S.-originated credit crisis has impacted the psychology of Chinese and also the real economy," Tang told Xinhua.
Investors, gripped by lingering fears of a global economic downturn, dumped equities to drive the stock market down 66 percent from its peak last October.
China's gross domestic product (GDP) expanded 10.1 percent in the second quarter, marking a deceleration for four consecutive quarters.
Its exports, a major driver behind the economy, reported slowing growth this year as the credit crisis reduced overseas demand for its goods. This also led to the closure of tens of thousands of local exporters and also job losses.
Local businesses bore the brunt of higher borrowing costs and were even finding it difficult to get credit after last year's tightening measures aimed at curbing inflation and averting economic overheating.
The easing in inflation has given room for the authorities to loosen monetary policy. The consumer price index rose 4.9 percent in August, off from the 12-year high of 8.7 percent in February.
"Inflation is no longer a threat with the declining commodities prices," Tang said.
The move was also a timely response to the rate cuts by other central banks and part of a coordinated effort to stem the global crisis, he said.
Six major central banks, including the U.S. federal reserve, slashed interest rates on the same day to cope with the current financial crisis.
The federal reserve lowered its target for the federal funds rate by 0.5 percentage points to 1.5 percent.
In another move to boost domestic demand, the State Council, China's Cabinet, said it would scrap the 5 percent individual income tax on savings interest earnings starting on Thursday.
China began levying a 20 percent individual income tax on interest earnings in 1999 to narrow the income gap and encourage consumption and investment. The tax rate was slashed to 5 percent on Aug. 15, 2007.
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(Xinhua News Agency October 9, 2008)