China Trims Rates Again

--1y lending rate 27 basis point to 5.31% --deposit rate to 2.25% --share of deposit 15.5% China's central bank unveiled its fifth interest-rate cut in just over three months as authorities continue efforts to spur the financial system to complement big government-spending plans. The People's Bank of China said Monday that the benchmark one-year lending rate would be cut by its usual margin of 0.27 percentage point to 5.31%. The rate was 7.47% when the central bank began slashing rates in mid-September. The central bank also cut the deposit rate by the same amount to 2.25%. In addition, to free up cash so that banks actually lend at the new, lower rate, the central bank cut the share of total deposits that banks must keep on reserve with it by half a percentage point to 15.5%. Beijing has pledged to use all available means to ensure its financial system is ready to bankroll businesses, individuals and government-backed projects to cushion the massive economy during its most significant shock in a decade. Monday's cut was widely expected, although it was smaller than some analysts predicted, and economists think more such moves are in store. The 'market may be disappointed by the small scale of China rate cuts,' said Stephen Green, chief China economist at Standard Chartered Bank. But Chinese officials 'want to save some ammunition up for next year,' he said. Interest rates in China don't have the same direct economic impact they generally do in more developed economies as lending decisions sometimes reflect political and other considerations that aren't much influenced by the cost of credit. Yet, the lower rates will reduce costs to the Ministry of Finance and government agencies seeking to tap China's $6.85 trillion in bank deposits as they sell bonds in local debt markets. The government needs to raise funds to pay for a $586 billion stimulus package of infrastructure investment and other spending to support the economy. Separately on Monday, local media cited a Chinese official as saying that the country's foreign-exchange reserves have declined somewhat since September, in what would mark a surprising reversal for a big indicator of China's financial muscle. China's foreign-exchange reserves 'have already fallen for the first time since December 2003,' said Cai Qiusheng, a department director at the State Administration of Foreign Exchange, according a transcript of comments he made at a weekend forum on foreign trade. The transcript was published on the Chinese Web portal Sina.com. 'Calculated on a month-to-month basis, their highest level was over $1.9 trillion, but they are now definitely lower than that figure,' the transcript quoted Mr. Cai as saying. China normally publishes the size of its reserves after the end of each quarter. Mr. Cai didn't specify the period during which the reserves fell, according to the transcript. A spokesman for SAFE, the arm of China's central bank that manages the reserves, couldn't confirm Mr. Cai's comments. Mr. Cai, who holds a midlevel position at SAFE, isn't well known outside the agency. China's foreign-exchange stockpile has ballooned every year since the late 1990s, apart from temporary reversals. The growth has been especially fast in recent years as Chinese exporters brought home money earned overseas and as foreign investors funded projects in the country. The central bank buys those incoming dollars, exchanging them for Chinese yuan. In October, the central bank said reserves had grown $377.3 billion in the first three quarters of the year to $1.91 trillion -- a record for any country. They were expected to top $2 trillion soon. While a recent slowdown in China's exports underscores how the nation hasn't sidestepped global economic turmoil, its trade surplus -- a big factor propelling the reserves buildup -- remained high at just over $75 billion for October and November. Given how reserves are accumulated, any fall may mostly reflect temporary factors, such as an adjustment in how Chinese companies manage their money. A sustained fall in China's dollar holdings would be more worrying, raising doubts about its attractiveness for investment and ability to stay the biggest foreign holder of U.S. Treasury bonds, the main asset in which China has put reserves. The 2003 fall in reserves referred to by Mr. Cai mostly reflected an injection by SAFE of $45 billion of reserves into two of the biggest banks as part of a government strategy to reduce their bad-debt levels. James T. Areddy