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China cuts interest rates as economy slows
People's Bank of China lowers key lending rates for the first time since 2008, in bid to advance financial reform.
Last Modified: 07 Jun 2012 20:09
Monetary easing had been widely expected following weaker manufacturing activity in May [GALLO/GETTY]

China cut interest rates for the first time in over three years and moved to allow rates to float more freely, in a bid to boost a slowing economy and advance financial reform.

With the interest cut set on Thursday, the one-year yuan lending rate will stand at 6.31 per cent and the one-year yuan deposit rate will be 3.25 per cent, the official Xinhua news agency said.

The People's Bank of China, or central bank, will also allow banks to offer deposit rates up to 10 per cent higher than the benchmark rate and provide loans with rates of up to 20 per cent lower.

Before, deposit rates were not allowed to float above the benchmark and lending rates could only be discounted by 10 per cent.

The cut came shortly before Saturday's release of economic data for May. Investors fear the data could further confirm a slowdown in various sectors including manufacturing activity.

Mark Williams, chief Asia economist at Capital Economics, said the cut was a signal that policymakers were concerned about growth.

"Policymakers are going all out to shore up the economy," he said.

The Chinese economy grew an annual 8.1 per cent in the first quarter of 2012, its slowest pace in nearly three years.

The rate cut follows last month's cut in the amount of money banks are required to keep in reserves, another move aimed at pumping more funds into the slowing economy.

In anticipation of the growth slowdown, the government has also reduced its economic growth target. It now expects a 7.5 per cent growth, a considerable decrease if compared to last year's 9.2 per cent growth.

China had previously raised interest rates five times since October 2010, in an effort to control surging inflation due to worries of social unrest.

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