May 10, 2015 6:19 AM

China cuts rates for 3rd time in 6 months to boost economy

The Associated Press

BEIJING (AP) China cut interest rates Sunday for the third time in six months to boost sluggish economic growth and announced that it is giving banks more flexibility in setting rates paid to depositors in a new step to make its financial system more market-oriented.

The central bank's rate cut reflects the communist leadership's growing urgency about reversing a deepening slump that threatens to cause a politically dangerous spike in unemployment.

Economic growth has fallen to its lowest level since the aftermath of the 2008 global crisis, and exports fell by 6.2 percent in April. Surveys of manufacturers showed factory employment in April fell to its weakest level in a year.

Citing "downward economic pressures," the People's Bank of China said Sunday that it would cut the rate on a one-year loan by commercial banks by 0.25 percentage point to 5.10 percent. The interest rate paid on a one-year deposit was lowered by 0.25 point to 2.25 percent.

Interest rates were also cut on Nov. 22 and then again on March 1.

Beijing has been expected to ease monetary policy since the Communist Party leadership promised to shore up growth following a meeting two weeks ago.

Communist leaders have affirmed their commitment to a "new normal" of slower, more sustainable growth but are very sensitive to the potential for political unrest in the event unemployment spikes up. The country's top economic official, Premier Li Keqiang, said in March that the government would respond if the employment situation worsened.

The state-owned banking industry lends mostly to state companies, so the biggest impact of the interest rate reduction would be on their financing costs. That suggests communist leaders see state industry, which they deem the core of the economy despite three decades of market-oriented reforms, as being under financial stress.

Regulators also are trying to make the banking industry more market-oriented in hopes of making the economy more competitive and efficient.

The central bank said Sunday that the band within which banks are allowed to set the interest rate they pay depositors will be widened from 1.3 times the benchmark rate to 1.5 times.

That will allow healthier banks to attract more deposits by offering higher interest. Banks already are allowed to set their own lending rates within a band of 1.3 times the benchmark rate.

Regulators also are trying to make banks more market-oriented with the introduction this month of the country's first deposit insurance system.

Such insurance could help force bank managers to pay closer attention to the financial health of their institutions by eliminating the expectation that Beijing would have to bail out an insolvent bank to protect its depositors. Under the new scheme, depositors could be compensated separately, while a failed bank could be wound down.


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