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To: wlheatmoon who wrote (46025)	6/9/1999 10:57:00 PM
From: wlheatmoon	Read Replies (2) \| Respond to of 86076

Financial Times News for tomorrow. China cuts interest rate to combat deflation By James Kynge in Beijing China yesterday announced its seventh and most aggressive cut in bank deposit rates since May 1996, signalling a concerted effort to combat deepening deflation amid signs that a fiscal stimulus package launched last year has begun to run out of steam. State media said that China's key interest rate on one-year fixed renminbi deposits would be slashed from 3.78 per cent to 2.25 per cent, effective today. Other deposit rates were cut by lesser magnitudes, resulting in an average reduction of one percentage point. Lending rates were lowered by significantly smaller margin than deposit rates, making it clear that China's prime motive was to stimulate consumer spending rather than corporate investment. The one-year lending rate was cut from 6.39 per cent to 5.85 per cent. Economists said the size of the one-year deposit rate cut betrayed disquiet among authorities over deflation, now China's most pressing economic problem. The decline in retail prices by 3.1 per cent in the first four months of this year, with April showing a year-on-year drop of 3.5 per cent, was seen as evidence that a fiscal stimulus package launched in August last year had largely failed to boost consumer demand. Pu Yonghao, senior economist at the Bank of China International, said: "This is a very aggressive move, but a move in the right direction. There is still some room for a further cut. It will remove some of the incentive for people to save money." Personal savings hit Rmb5,840bn ($705bn) at the end of April, 19.2 per cent higher than at the same time last year. Economists said that the prime motivation behind the surge in savings was popular anxiety over the future, in a society where the old certainties of socialism - lifetime employment, subsidised housing, medical care and education - are being sacrificed in the name of free market reform. For this reason, economists said, it was uncertain whether the cut would be enough to trigger a consumer spending splurge. If it does not, calls for a slowdown in reforms from an increasingly vocal set of policy advisers - some calling themselves the "New Left" - may intensify. Some Chinese economists have warned that a significant interest rate cut could increase pressure on the renminbi. However, the Chinese government shows no sign of weakening its resolve not to devalue the Chinese currency, which is not fully convertible. Industrial output, driven upward late last year by a fiscal stimulus package, showed signs of slowing in May, compared to the same month a year earlier, statistics announced yesterday showed. Output climbed by 8.9 per cent to Rmb171.6bn in May, compared with a 9.7 per cent year-on-year increase in the first four months.

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