MercoPress. South Atlantic News Agency

World markets celebrate after China cuts benchmark interest rates

The People's Bank of China slashed its one-year rate for deposits by 25 basis points to 2.75% and its one-year lending rate by 40 basis points to 5.6%.

China's central bank on Friday unexpectedly cut benchmark interest rates for the first time in more than two years, as authorities seek to prop up flagging growth in the world's second-largest economy.

 The cut comes after a string of disappointing data showing that the Chinese economy is struggling with stalling factory growth, soft exports and a weakening property market.

The news had an immediate positive reaction from world markets and commodity prices.

China's economy expanded 7.3% in the July-September quarter, down from 7.5% in the previous three months and the slowest since 2009 at the height of the global financial crisis.

The People's Bank of China slashed its one-year rate for deposits by 25 basis points to 2.75% and its one-year lending rate by 40 basis points to 5.6%, both effective Saturday, a statement said. The cuts mark the first since the summer of 2012 when the PBoC slashed rates in the month of June and then again in July.

China had since April used a series of limited measures to underpin growth, including targeted cuts in reserve requirements -- the amount of funds banks must put aside -- and a 500 billion Yuan (81.6 billion) injection into the country's five biggest banks for re-lending.

Analysts, however, said recent weakening economic indicators, including for manufacturing and industrial output, had pressured authorities to take bigger steps.

“The PBoC is forced to realize that China's economy is slowing down significantly, deflationary risk is rising fast,” said ANZ economist Liu Li-Gang.

China's consumer price index (CPI) was unchanged at a near five-year low of 1.6% in October, while the producer price index -- a measure of costs for goods at the factory gate -- declined for the 32nd straight month.

Investors in Europe cheered the news, with Frankfurt's DAX 30 and Paris' CAC 40 both rallying more than two percentage points in early afternoon and London's benchmark FTSE 100 index gaining more than one percentage point.

The decision to cut rates came a day after a closely-watched private survey showed that manufacturing activity in China stagnated in November to a six-month low.

British banking giant HSBC said Thursday that its preliminary purchasing managers' index reading came in at the 50.0 breakeven point.

It was lower than October's 50.4 and was the weakest since May's 49.4, according to the bank's data. A reading above 50 indicates expansion in the sector, while a reading below 50 indicates contraction.

Hu Xingdou, an economist at the Beijing Institute of Technology, said that the cuts are a positive in that they “could increase liquidity and encourage economic growth” by benefitting corporations.

Falling prices in China's property sector are a key issue weighing on economic growth. New home prices in China declined for a sixth straight month in October, according to a private survey, though the pace of the fall slowed sharply.

Some analysts have also expressed concern about the overall health of the country's financial system.

Chinese President Xi Jinping acknowledged earlier this month in a speech to a meeting of Asia-Pacific business executives in Beijing that the economy faces financial risks, but expressed confidence they are manageable, describing them as “not that scary”.