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The Globe and Mail

China surprises with second rate cut this year

A migrant worker dismantles scaffolding on the front of a new building at a construction site in central Beijing.


China's central bank cut interest rates for the second time in two months on Thursday to bolster an economy widely expected to record its sixth successive slide in growth in April-June.

China announced the rate cut as the Bank of England launched a third round of monetary stimulus and the European Central Bank cuts its main interest rate. Policymakers globally are trying to combat the impact of the euro area debt crisis on the world economy.

China's benchmark lending rates will be lowered by 31 basis points to 6 per cent, and deposit rates will be cut by 25 basis points to 3 per cent, the People's Bank of China said in a statement on its website.

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The cuts are effective from Friday. The central bank last cut interest rates on June 7.

The central bank also took another step in liberalizing interest rates by lowering the floor for lending rates to 70 per cent of benchmark rates from 80 per cent previously.

"The fact that China is actually cutting lending and deposit rates is a bigger deal than just reducing the reserve requirement," said David Morrison, market strategist at GFT Global. "But there's a great big Chinese data dump next week, so the question is whether this is a heads-up that the data will not be as good as hoped."

China is due to release data next week covering the second quarter and the month of June.

A Reuters poll published on Thursday showed that economists expect the data to show China's economy expanded in the second quarter by 7.6 per cent from a year earlier, its weakest performance since the 2008-09 financial crisis.

That would be down from 8.1 per cent in the first quarter and a sixth straight quarter of slowing growth.

China has lowered the amount of cash banks must keep in reserve in three 50-basis point steps since November, freeing up an estimated 1.2-trillion yuan for fresh lending. The last cut was in May.

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Beijing has also fast-tracked investment projects and rolled out new incentives to spur consumer spending on energy-efficient products, but it has studiously avoided any hint so far of putting together a repeat of the 4-trillion yuan fiscal spending package rolled out in 2009-10.

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