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Jun 8, 2012 7:02 AM GMT+0800 China cut borrowing costs for the first time since 2008 andloosened controls on banks lending and deposit rates, stepping upefforts to combat a deepening slowdown as Europe s debt crisisthreatens global growth. The one-year lending rate declines by a quarter percentage pointtoday to 6.31 percent, the People s Bank of China said in astatement yesterday. The one-year deposit rate drops the sameamount, to 3.25 percent. The extra leeway banks will get todetermine rates at variance from the official setting was called a milestone by UBS AG. The move, before China reports inflation, investment and outputfigures tomorrow, may signal that the economy is weaker than thegovernment anticipated. Policy makers across the globe are alsogirding for a deeper impact from Europe s woes, with Australia andBrazil also lowering rates in the past eight days. This will be the beginning of a rate cut cycle and there will beat least one more reduction this year, said Shen Jianguang, aHong Kong-based economist with Mizuho Securities Asia Ltd. who hasworked for the European Central Bank. The data to be releasedover the weekend must be very weak and inflation must have easedsharply. European stocks rose on China s announcement, as did Americanshares before most closed lower on a late-day slump in banks andtechnology companies. The MSCI World Index closed up 0.6 percentfor a third day of gains. Unprecedented Change Banks can offer a 20 percent discount to the key lending rate, upfrom a previous 10 percent, China s central bank said yesterday.Lenders will for the first time be able to offer savers depositrates that are up to 10 percent higher than the benchmark. The deposit-ceiling move is unprecedented and a milestone forinterest-rate liberalization, said Wang Tao, chief Chinaeconomist at UBS in Hong Kong, who previously worked at theInternational Monetary Fund. U.S. Treasury Secretary Timothy F. Geithner has pressed China onthe limit, calling as recently as April 26 for an increase to givesavers higher returns and stoke consumer spending. The practice ofkeeping the deposit rate below the pace of inflation had forcedhouseholds to save excessively, he said in a speech in SanFrancisco. Weaker Lending In China, the rate move signals policy makers concern at weaknessin demand for loans. Three bank officials told Bloomberg News lastmonth that the nation s biggest lenders may fall short of loantargets for the first time in at least seven years as demand forcredit wanes. The central bank last reduced interest rates in late 2008, when thegovernment unveiled a 4 trillion yuan ($586 billion at the time)stimulus package. Now, Chinese officials are monitoring the threatto exports from Europe s crisis as Greece prepares for an electionon June 17 that may determine whether it remains in the euroregion. A crackdown on property speculation is also cooling theworld s second-biggest economy. The yuan is down about 1 percent against the dollar this year,closing at 6.3635 yesterday. In Wenzhou, an eastern Chinese city known as a center ofentrepreneurship, smaller businesses are in a much more diresituation now than during the financial crisis, Zhou Dewen, headof the small and medium enterprise association, said in aninterview in his office this week. Pace of Change Loosening restrictions on interest rates shows that the economicslowdown and the turbulence of Bo Xilai s ouster from theCommunist Party leadership aren t derailing policymaking orefforts to reshape the financial system. The central bank haswidened the yuan s trading band, while Premier Wen Jiabao hascalled for the monopoly of big lenders to be broken. The government may be getting ready to step up its pace offinancial reforms, HSBC Holdings Plc said in a note. Policymakers regret that the 2008 financial crisis was not used tointroduce more reforms, so this time they want to take advantage ofthe window, said Chen Zhiwu, a finance professor at the NewHaven, Connecticut-based Yale School of Management. Australia s central bank cut interest rates this week, citingEurope s crisis and moderating growth in China. The EuropeanCentral Bank held its key rate at a record low, with PresidentMario Draghi saying that officials stand ready to act. The Bank ofEngland kept its benchmark at a record low, while refraining fromexpanding a stimulus program. Bernanke s View In the U.S., Federal Reserve Chairman Ben S. Bernanke said policymakers are ready to act, without specifying any possible steps.Vice Chairman Janet Yellen said that the U.S. economy remainsvulnerable to setbacks and may warrant additional monetarystimulus. Dennis Lockhart, president of the Fed s Atlanta bank,said extending Operation Twist, a policy of buying longer-termbonds, is an option on the table. Industrial output in China, the world s biggest producer of steeland cement, probably rose 9.8 percent last month from a yearearlier, close to the slowest pace in three years, according to themedian estimate in a Bloomberg News survey of 27 economists aheadof a report due June 9. Fixed-asset investment may have grown at a slower pace in the firstfive months, with Caterpillar Inc. (CAT), the world s largestmaker of construction and mining equipment, among companiesreporting a slowdown. Weaker Inflation Inflation may have moderated to 3.2 percent in May from a yearearlier after a 3.4 percent rate in April, a separate surveyshowed, the fourth month consumer prices have climbed by less thanthe government s 2012 target of 4 percent. China s manufacturing expanded at the slowest pace in six monthsin May, a government report showed on June 1. A separate purchasingmanagers index from HSBC Holdings Plc and Markit Economicspointed to a seventh straight contraction, the longest stretchsince the global financial crisis. The PBOC cut banks reserve requirements in November for the firsttime in three years, and again in February and May, to spurlending. Wen and the State Council pledged last month to place greateremphasis on stabilizing growth after April industrial production,new loans and exports were less than economists forecast. Measuresso far have included speedier project approvals and incentives forhome-appliance purchases. Cutting Forecasts Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp.have cut economic-growth estimates for China. Expansion may drop to7 percent or slightly below this quarter from a year earlier,Tao Dong, a Hong Kong-based economist with Credit Suisse Group AGsaid last month. Ding Shuang, a Hong Kong-based economist atCitigroup Inc., forecast 7.5 percent. That follows an 8.1 percentexpansion in the first three months of the year, the fifthquarterly deceleration. Tao said the government may respond with a stimulus of as much as 2trillion yuan, half the size of a package announced in late 2008 tocushion the economy from the impact of the global financial crisis. Even so, the official Xinhua News Agency said in a May 29 articlethat the government has no intention of rolling out another massive stimulus, damping speculation of more aggressivepolicies to support growth. 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