China’s PBOC Cuts Interest Rates for First Time Since 2012.

http://www.bloomberg.com/news/2014-11-21/china-central-bank-cuts-interest-rates-for-first-time-since-2012.html

China cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world’s second-largest economy.

The one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent, while the one-year lending rate was reduced by 0.4 percentage points to 5.6 percent, effective tomorrow, the People’s Bank of China said on itswebsite today.

The reduction puts China on the side of the European Central Bank and Bank of Japan in deploying fresh stimulus and contrasts with the Federal Reserve, which has stopped its quantitative easing program. Until today, the PBOC had focused on selective monetary easing and liquidity injections as China heads for its slowest full-year growth since 1990.

“It’s absolutely the right thing to do,” said Wang Tao, chief China economist at UBS AG in Hong Kong. “Real interest rates have moved up significantly with slowing growth and inflation, which hurts corporate cash flow and balance sheet and threatens to increase non-performing loans.”

The cut in the benchmark rates follows liquidity injections and targeted cuts to reserve requirements. Although the PBOC scrapped controls on most borrowing costs in July 2013, banks still use benchmark rates as a guide for loans including mortgages.

Today’s move suggests a shift toward pro-growth policies that may fuel even more debt. An unprecedented lending spree from 2009 to 2013 led to a surge in debt on a scale that’s triggered banking crises in other economies, according to the International Monetary Fund.

China’s total debt reached 251 percent of gross domestic product as of June, up from 234 percent in 2013 and 160 percent in 2008, according to Standard Chartered Plc estimates.

A pedestrian walks past the People's Bank Of China headquarters in the financial district of Beijing.