China slashes interest rates as panic spreads

The People’s Bank of China cut interest rates by more than 1pc point as the economy crumbles and millions of jobs are predicted to go ahead of Christmas.


Factory workers surround a damaged police car during a protest outside Kai Da toy factory in Dongguan, China. Photo:REUTERS

The move came just one day after the World Bank predicted that China would grow by 7.5pc next year. The level of growth may appear robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades.

It is also perilously close to the 7pc minimum level of growth that Chinese economists believe is necessary in order to create enough jobs for the 6m university graduates who will enter the jobs market next year.


Factory workers smash an office during a protest at Kai Da toy factory in Dongguan, China. Photo: REUTERS

It is the fourth interest rate cut from the Chinese central bank in the last ten weeks as the government desperately battles an evident economic collapse. “China is out to save itself here,” said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

The PBOC reduced its main borrowing rate by 1.08pc points to 5.58pc, the biggest one-off cut since the Asian Financial Crisis in 1997.

In recent weeks, a series of riots across central and southern China have flowered as disgruntled employees aired their grievances at the downturn.

Today, around 500 protesters rioted at the Kai Da toy factory in Dongguan in the Pearl River delta, flipping over a police car and trashing computers in a dispute over payoffs to 80 fired workers. Tens of thousands of factories across the region have already shut their gates.

Yin Weimin, China’s Social Security minister, has revealed that employment is the Communist Party’s number one concern in the downturn and said the “situation is critical”. Unemployment is expected to rise from 4pc to 4.5pc by the end of the year and anecdotal reports have suggested that 3m people have already been fired in the industrial province of Zhejiang alone.

Two major provinces, Shandong and Hubei, have already responded by banning companies from firing staff without permission from the government.

The Chinese government has also announced a £373bn bailout to stimulate domestic growth by investing in infrastructure. However, only a fifth of the money is likely to come from central government coffers, with the rest coming from a mix of private enterprise and local government funds.

“We’re seeing a government that steps in, that is trying to do everything it can to keep growth at a decent rate, and has the financial means and the administrative capacity to make that happen,” said Louis Kuijs, the head of the World Bank’s China economics analysis.

“All my colleagues were shocked by such a big easing. It signals the government may believe the economic situation is really serious for it to call for such a drastic move,” said Liu Dongliang, a currency analyst at China Merchants Bank in Shenzhen.

The reserve requirements of Chinese banks were also cut by 1pc point, and 2pc points for smaller banks, freeing up around 360 billion rmb (£34bn) for lending.

By Malcolm Moore in Shanghai
Last Updated: 12:48PM GMT 26 Nov 2008

Source: The Telegraph

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