China Cuts Key Interest Rate

China's central bank announced a cut in a key interest rate Monday to stimulate growth as inflation has eased, the first drop in the cost of borrowing in more than six years.

In a notice posted on its Web site, the bank said it was lowering the rate on one-year yuan-denominated loans by 0.27 percent to 7.20 percent effective Tuesday.

The People's Bank of China also cut the share of deposits that banks must hold in reserve by 1 percentage point to 16.5 percent starting Sept. 25. However, it said major state banks would hold off on enacting the measure, which would slightly increase the pool of money available for lending.

The adjustment would bring the reserve ratio down from a record 17.5 percent after five hikes in a row this year, according to the government's official Xinhua News Agency.

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 of China will retain the old reserve ratio for the time being, the bank statement said.

Regulators have steadily raised interest rates over the past three years to contain pressure for prices to rise.

However, the inflation rate eased to 4.9 percent in August, the lowest in 14 months, easing concerns Beijing would take additional steps that could slow the economy further.

The rate cut is the first since February 2002, when the central bank reduced the benchmark one-year lending rate to 5.31 percent from 5.85 percent. At the time, the central bank cited China's economic development and the internal and external environment following the dot-com bust.

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Since 2003, the bank has been gradually tightening monetary policy in an attempt to cap inflation and avoid economic overheating, but Monday's move was apparently prompted by concerns that a slowing of the economy was now the major concern.

The rate cuts aimed to "resolve the present stand-out problems in the operation of the economy, consolidate targeted solutions ... and maintain continued stable, relatively fast development of the national economy," the bank's statement said.

The step is likely to boost flagging stock prices that fell to a 22-month low last week. China's two exchanges were closed on Monday, which was a public holiday.

Chinese leaders have put a priority on fighting an inflation surge blamed on shortages of pork and grain that began in mid-2007, imposing price controls, credit curbs, and subsidies to raise farm production. Consumer prices in August were down from July's 6.3 percent and well below February's 8.7 percent rate -- the peak of the inflation surge.

But officials face an unexpectedly sharp downturn in economic growth, which could cost jobs and fuel social tensions.

China's trade surplus hit a record $28.7 billion in August, but export growth slowed to 21.1 percent, down from July's 26.9 percent, the government reported.

Analysts have cut growth forecasts this year to as low as 9 percent, down from 2007's sizzling 11.9 percent. That still would be the fastest rate for any major country, but Beijing wants to keep growth high to reduce poverty and create new jobs.

The interest rate cut came as financial markets reverberated from the news that Lehman Brothers, burdened by $60 billion in soured real-estate holdings, was filing for bankruptcy, and that Bank of America Corp. had agreed to buy Merrill Lynch & Co.

Until recently, China's own real estate sector and its financial markets, isolated by limits on foreign investments, were relatively unscathed by the turmoil afflicting other markets.

But the global slowdown in demand has begun to take a toll at a time when mainland China's own financial markets are languishing in a near yearlong correction. Property prices have begun to cool and growth in exports has begun to slow.

China's industrial output growth rate fell to its lowest level in 18 months in August, adding to signs its rapid economic expansion faces a sharp downturn.

Analysts have cut forecasts of China's economic growth this year to as low as 9 percent, down from last year's 11.9 percent.

Shanghai-based AP business writer Elaine Kurtenbach contributed to this report.

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[Gary47]

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