BEIJING: China’s leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making.

Friday’s surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank, which had persisted with modest stimulus measures before finally deciding last week that a bold monetary policy step was required to stabilise the world’s second-largest economy.

Economic growth has slowed to 7.3 per cent in the third quarter and policymakers feared it was on the verge of dipping below 7pc — a rate not seen since the global financial crisis. Producer prices, charged at the factory gate, have been falling for almost three years, piling pressure on manufacturers, and consumer inflation is also weak.

“Top leaders have changed their views,” said a senior economist at a government think-tank involved in internal policy discussions.

The economist, who declined to be named, said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans.

China cut the RRR for some banks this year but has not announced a banking-wide reduction in the ratio since May 2012.

“Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the think-tank’s economist said.

Friday’s move, which cut one-year benchmark lending rates by 40 basis points to 5.6pc, also arose from concerns that local governments are struggling to manage high debt burdens amidst reforms to their funding arrangements, the sources said.

The cut helped send Asian shares broadly higher on Monday. The CSI300 Index of the largest companies listed in Shanghai and Shenzhen opened up 1.2pc at its highest level since June 2013, while the Shanghai Composite Index opened up 0.8pc.

Top Chinese leaders had been resisting a rate cut, fearing it could fuel debt and property bubbles and dent their reformist credentials, but were eventually swayed by signs of deteriorating growth as the property sector cooled.

Until then, they had persisted with targeted policy steps, such as cuts in reserve ratios for selected banks and liquidity injections into the banking system. But these failed to bring down borrowing costs for the corporate sector.

“Increasing liquidity by the central bank has failed to lower borrowing costs for the real economy,” said a former central bank researcher who now works for the government.

“Employment still holds up, but corporate profits have been squeezed as producer price deflation bites, and it’s unreasonable for banks to have hefty profits.”

Many Chinese economists had been calling for bolder policy actions, as recent data showed the economy losing more steam in the fourth quarter and consumer price inflation falling. Full-year growth is on track to undershoot the government’s 7.5pc target and mark the weakest expansion in 24 years.

Published in Dawn, November 25th , 2014