China cuts interest rates

NEW YORK (CNNMoney) -- China's central bank said Thursday it would cut interest rates, the second time less than a month that the bank has acted jumpstart a slowing economy.

The People's Bank of China brought its one-year lending down by 0.31 percentage point 6%. The bank trimmed one-year benchmark deposit rates 0.25 percentage point to 3%.

The rate cuts follow a slew of recent disappointing economic data, concern about a slowdown in growth. Economists are especially watchful, China is now the world's second-largest economy the United States.

Readings earlier this week showed China's manufacturing sector weakened in June. The Chinese government, in survey of purchasing managers, noted that was a sharp drop in new export orders as weakness in other of the world affected the Chinese economy.

In June, the bank responded to economic concerns by cutting interest rates for the first since 2008. The bank also tried to spur growth in May cutting the amount of money banks are required to in reserves, freeing up those funds in to boost investment.

While China's gross domestic , the broadest measure of economic health, continued to grow an 8.1% annual rate for the first quarter, the number was down sharply from the 8.9% growth at end of last year.

Economists were surprised the announcement, expecting the next benchmark rate cut earlier than the end of July.

"There was widespread anticipation the required reserve ratio would be cut again soon, but most expecting the next benchmark rate cut to delayed," said Mark Williams, chief Asia economist at Capital Economics. "This is a step beyond what was expected policymakers."

Williams said that are two explanations for the decision came earlier than he initially thought. The first reason, said, is that policymakers weren't happy June data and decided to swift action.

"Reports in the last couple of days suggested that lending by the major banks was lower in June in May, when economic recovery depends on a rebound credit growth," he said.

The second reason is that the central bank wanted to pace with Europe's central bank, which cut its main lending to 0.75% on Thursday.

"Policymakers may have felt that cutting rates the day that the ECB is widely expected to do the would deliver a bigger impact, encouraging talk of a coordinated response the slowdown in the global economy."

The announcement is seen as another step liberalizing the Chinese economy, something that Jay Bryson, global economist Wells Fargo Securities, said the nation has working toward for the last two years.

"In the U.S., the Fed isn't telling banks much they can charge or pay for deposits ... in China, they're moving from that," he said. "If China wants to have a world-class financial system, it needs have a liberalized financial market, and this shows they're moving in that direction."


Adapted from: CNN, July 5, 2012.