China's surprise rate cut boosts hopes of global action - China Kitchen Cabinet Plinth

economy. "The Federal Reserve remains prepared to take action as needed toprotect the U.S. economy in the event that financial stressesescalate," Bernanke said in prepared testimony to the U.S.Congress. Marc Ostwald, a rate strategist at Monument Securities in London,said the China rate cut combined with Federal Reserve hints andhopes in markets that Europe will deal urgently with Spain'sbanking crisis would support risk assets. "It will be construed positively particularly in close alignmentwith what we've seen," he said.

The People's Bank of China, the central bank, cut the officialone-year borrowing rate by 25 basis points to 6.31 percent and theone-year deposit rate by a similar amount to 3.25 percent. The cuts confounded the call of many economists who thought thecentral bank would refrain from cutting policy rates this year eventhough policymakers had voiced the need to support growth. "It's obviously a very strong signal that the government wants toboost the economy, given the current weakness, especially indemand," Qinwei Wang, economist at Capital Economics in London,told Reuters. The European Union is China's single biggest foreign customer, andfaltering demand there has led to worries about the knock-on effectto domestic consumption if industrial activity slows dramatically. A sudden collapse in global trade in late 2008 saw an estimated 20million Chinese jobs axed in a matter of months, prompting Beijingto roll-out a 4 trillion yuan ($635 billion) fiscal stimulus planto bolster domestic economic activity.

While the cut to borrowing costs should help in the near term toshore up an economy on course for its weakest full-year expansionsince 1999, the central bank also gave banks more room to setcompetitive lending and deposit rates to further liberalize China'sfinancial market. The rate cut, announced after financial markets closed in Asia,helped shares elsewhere rally. World shares, measured by the MSCIworld equity index rose to its highest level in more than a week.The euro rose. China last changed the borrowing rate in July 2011 when the 1-yearbenchmark lending rate was raised by 25 bps to 6.56 percent. GOOD AND BAD European leaders have been alarmed about the latest turbulence inthe euro area debt saga as Spain is fast losing the confidence offinancial markets, and a Greek election this month could pushAthens closer to leaving the bloc.

After the G7 call this week, Japan's Finance Minister Jun Azumisaid the grouping shared the view that it should work to easefinancial market worries ahead of a G20 meeting in Mexico laterthis month, where Europe is likely to top the agenda. Janet Yellen, the Fed's vice chair, warned on Wednesday of"significant" risks facing the economy. "Hence, it may well be appropriate to insure against adverseshocks," she said in remarks before the Boston Economic Club. Several countries, including China and India, have seen economicgrowth take a hit this year as the euro zone crisis has hurt globalconfidence. Several euro area countries are struggling withrecession.

Still, China's policy announcement on Thursday raised concerns forsome that the rate move is pre-empting grim news in a deluge ofChina data due over the weekend that will include all of thecountry's key barometers, such as investment and industrialproduction. "The concern is that with industrial production and CPI data comingout of China at the weekend, that it's indicative of them knowingsomething about weak data going forward," said Adrian Schmidt,currency strategist at Lloyd's Bank in London. The market consensus was for May's data to show signs of theeconomy stabilizing from a surprisingly weak April, albeit keepingit on course to deliver its weakest quarter of growth in threeyears in the second quarter. The April data had prompted an immediate cut in bank reserves, anda call from Premier Wen Jiabao that policymakers give "morepriority to maintaining growth." The PBoC has cut bank reserves for the biggest banks by 150 basispoints from a record-high of 21.5 percent in three moves sinceNovember, after a two-year tightening campaign to rein in inflationand cool steaming economic growth. That has freed an estimated 1.2 trillion yuan ($190 billion) fornew lending, as Beijing sought to stimulate economic activitywithout resorting to a major fiscal spending package like 2008'sinitiative.

Beijing is still tackling the after-effects of that program, whichtriggered a frenzy of real estate speculation, saw localgovernments amass 10.7 trillion yuan of debt, and drove inflationto a three-year peak by July 2011. (Additional reporting by Koh Gui Qing and Aileen Wang; Editing byNeil Fullick).

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