China's central bank cuts rates as economy slows

BEIJING - China's central bank cut interest rates Friday and promised to inject extra credit into the financial system if needed amid a deepening slowdown in the world's No. 2 economy.

The People's Bank of China said it acted to address "financing difficulties" caused by a shortage of credit. It also said the move was not a change in monetary policy and economic conditions are within an "appropriate range."

China's economic growth fell to a five-year low of 7.3 percent in the latest quarter and manufacturing and other indicators are declining. That has prompted suggestions Beijing might intervene to prop up growth.

The rate charged by banks for loans to each other rose this week to its highest level since early October, reflecting reduced availability of credit, a concern for Chinese economic planners.

"If necessary, the central bank will provide timely liquidity support," or extra credit to markets, it said in a separate statement.

The bank cut the rate on a one-year loan by commercial banks by 0.4 percentage point to 5.6 percent. The rate paid on a one-year savings was lowered by 0.25 point to 2.75 percent.

It was the first rate cut since July 2012.

The move narrows the margin between savings and lending rates, giving more money to borrowers and savers by reducing the amount that goes to state-owned banks.

The Cabinet called this week for steps to reduce financing costs for industry as part of efforts to make the economy more efficient and productive.

Changes in interest rates have a limited direct effect on China's government-dominated economy but are seen as a signal to banks to lend more and to state companies that they are allowed to step up borrowing.

Friday's rate cut will benefit state companies by reducing their borrowing costs. Most of China's private companies cannot get loans from the state-owned banking industry and rely on an underground credit market.

"The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks," said Mark Williams of Capital Economics in a report.

"This does not necessarily signal that policymakers are going back on efforts to support smaller companies, or giving up on 'targeted easing,' but they apparently feel larger firms are now in need of support too."