China Cuts Rates as U.S. Turmoil Adds to Global Risks

China cut interest rates for the 1st time in 6 years and allowed banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dimmed the outlook for economic growth. The People's Bank of China reduced the one-year lending rate to 7.20% from 7.47%, and lowered the reserve ratio at the nation's smaller banks by 1% point.

Lehman Brothers Holdings filed for bankruptcy recently and Merrill Lynch agreed to be sold, adding to evidence that the credit crisis is deepening and threatening the global economy. The slowest inflation in 14 months has given China room to cut borrowing costs and protect jobs in the world's 4th-largest economy. The chief investment strategist at CFC Seymour Ltd. in Hong Kong said policy makers see the probability of a recession in the U.S. is higher now, so the outlook for Chinese exports has deteriorated. This is the beginning of an easing cycle in China, he said. He was the only one of seven economists in a Bloomberg survey recently to predict a rate cut this year or in the first quarter of 2009. The announcement came on a holiday, with markets closed. The rate cut is "to help solve important problems in our economy for its continued stable and fast development," the central bank said. Inflation cooled to 4.9% in August, export growth slowed and industrial production expanded by the least in 6 years, according to data released recently. China's economy expanded 10.1% in the 3 months to June 30 from a year earlier, the 4th straight quarter of slower growth.