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Asia Economy Last Updated: Mar 2, 2015 - 7:30 AM

China in surprise rate cut to boost sagging economy
By Michael Hennigan, Finfacts founder and editor
Mar 2, 2015 - 7:27 AM

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China's central bank on Saturday cut interest rates to boost the sagging economy as manufacturing activity data remains weak.

China's official purchasing managers index (PMI), a measure of business sentiment, contracted for the second straight month in February, according to government data released Sunday. Today the HSBC index showed a slight rise.

The HSBC PMI – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy - posted at 50.7 in February, compared to the earlier flash reading of 50.1. This was up from January’s reading of 49.7, and signalled the first improvement in the health of the sector since last October, albeit marginal.

However, during this shutdown month for the Chinese New Year, the data are not reliable as many factories stopped shipments early in the month.

Annabel Fiddes, economist at Markit said: “China’s manufacturing sector saw an improvement in overall operating conditions in February, with companies registering the strongest expansion of output since last summer while total new business also rose at a faster rate. However, the renewed fall in new export orders suggests that foreign demand has weakened, while manufacturers continued to cut their staff numbers (albeit fractionally). Meanwhile, marked reductions in both input and output prices indicated that deflationary pressures persist.”

On Saturday, the People’s Bank of China cut its benchmark interest rate by a quarter point for the second time in three months, to 5.35% and it lowered its one-year benchmark deposit rate by the same amount to 2.5%.

The Financial Times says that the moves, which come just days ahead of the National People’s Congress annual meeting this week, are intended to combat deflation and spur lending.

“In recent months the scale of consumer price increases has come down and the scale of producer price falls has widened, and this has had the effect of pushing up the level of real interest rates,” the PBoC said when it cut rates on Saturday.

The Wall Street Journal reports that the government is expected to prop up economic activity through several more broad cuts in interest rates and greater spending on big-ticket infrastructure projects, but many Chinese officials and economists warn that such moves entail risks. Too much easing, in particular, could add to already high debt levels among companies and local governments and stall plans to deleverage, reduce industrial overcapacity and force greater efficiencies on state companies.

The Journal says: "For much of last year, the PBOC, under long-serving Governor Zhou Xiaochuan , insisted on targeted efforts rather than broader moves like rate cuts out of concern that broadly easing credit would worsen debt problems.

But increasingly, the central bank is acceding to demands from the Chinese leadership to reduce financing costs for businesses and bolster growth, according to officials and advisers to the bank."

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