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China cuts rates, lowers reserve ratio

By Xin Zhiming (China Daily)
Updated: 2008-09-16 07:02

China's central bank Monday cut the cost of bank loans, the first time since 2002, and lowered the proportion of money lenders must have as reserves, the first such move in nine years, to keep the economy from sliding further.

The benchmark lending rate will be lowered by 0.27 percentage point to 7.20 percent from Tuesday.

A Chinese flag flies over the People's Bank of China in Beijing in this file photo. China's central bank Monday cut the cost of bank loans and lowered the proportion of money lenders must have as reserves. [Agencies]

However, benchmark deposit rates remain unchanged with the one-year rate to be kept at 4.14 percent, a proof that the central bankers are keeping an eye on inflation.

The 1 percentage point cut from the reserve requirement ratio of 17.5 percent does not apply to the five biggest banks (the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications) and the Postal Savings Bank, the People's Bank of China (PBOC) said on its website.

Some Market watchers said that the central bank might be concerned with the six lenders' higher exposure to housing mortage loans. Following the heels of the United States and other countries, China's housing price is now declining nationwide, after two years' ferocious surge.

Banks in areas hit by the devastating May 12 earthquake will have their ratio cut by 2 percentage points.

These changes will come into effect from Sept 25.

The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks.

China had ratcheted up the ratio, from 6 percent in August 2003 to 14.5 percent in December, 2007 and to 17.5 percent in June, 2008.

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