It was the eighth fall in interests announced by the People's Bank of China, the central bank, since May 1996.

According to the central bank, the annual interest rate of current account deposits is lowered from 0.99 percent to 0.72 percent as of Thursday, and that of one-year fixed-term deposits is lowered from 2.25 percent to 1.98 percent.

The annual interest rate of various loans is lowered by an average of 0.5 percentage points. The interest rates for deposited reserves by financial institutions in the central bank is lowered from 2.07 percent to 1.89 percent.

"The latest interest rate cut suggests the central bank is relaxing its `sound' monetary policy to deal with the present economic slowdown,'' said Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences.

Figures from the National Bureau of Statistics reveal the Chinese economy grew 8.1 percent in the first quarter of last year, 7.8 percent in the second quarter, 7 percent in the third quarter and 6.5 percent in the fourth quarter.

The implementation of the "sound'' monetary policy was mainly because of worries that inflation may occur and the country's financial system may be unsafe.

These fears stem from the big amount of non-performing loans and the fierce competition from foreign banks following China's accession to the World Trade Organization, said Niu Li, a senior economist with the State Information Centre.

But figures from the National Bureau of Statistics show that the consumer price index, a key inflation gauge, dropped 0.3 percent last December compared with the same month of 2000.

The decrease follows a drop of 0.3 percent in November and a decline of 0.1 percent in September.

"This is a dangerous warning," Niu said. "If the situation continues, China will suffer deflation."

Monetary policy, whose effects are weaker than that of the country's pro-active fiscal policy in stimulating domestic demand, should play a role in backing economic development, Niu said.

"The interest rate cut is a wise choice, although the impact will be very limited,'' Yuan said.

He added the rate cut would at least send a piece of good news to the country's sluggish stock markets.

The interest rate cut will also help ease the pressure of renminbi appreciation, which will harm the country's exports already decreasing because of the slowdown in the global economy, Yuan said.

Yuan said the government is pinning hopes on stimulating domestic demand -- fixed assets investment and consumption -- to boost the economy.

But he said it could not expect Chinese urban consumers to spend more as people are now struggling with worries like pensions, medical care and children's education.

As for investment, the policy played an important role as it greatly depended on government injections and treasury bonds in particular, he said.

(China Daily February 21, 2002)