China interest rate cut sparks fears of grim economic data

BEIJING Global cheers over China's decision to cut interest rates faded on Friday as investors and economists worried that the move signalled the impending release of grim economic data.

China's surprise rate cut unveiled on Thursday boosted hopes that cheaper credit would help combat its faltering economic growth, and it encouraged global share markets in their belief that the major economies were stepping up stimulus.

But the central bank's cut, the first since the global financial crisis in late 2008, also raised concerns the economy may be weaker than previously thought.

Asian shares lost ground on Friday, worried that a deluge of May Chinese data due this weekend could produce ugly numbers.

Reuters polls published earlier in the week suggested the world's second-largest economy probably showed signs of stabilising last month from a surprisingly weak April.

Now, those expectations are in doubt. "The rate cut should have been a positive but it comes at suspicious timing," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley in Tokyo. "It makes people think that really bad news is going to be unleashed this weekend."

The People's Bank of China (PBoC) cut the official one-year borrowing rate by 25 basis points to 6.31 percent, and the one-year deposit rate by a similar amount to 3.25 percent.

The cut marked Beijing's biggest move to date to support growth. Premier Wen Jiabao had announced on May 23 a decision to accelerate key investment projects, adding to other efforts to support growth, including three cuts in bank reserves since last November and signs that the government was speeding up fiscal spending.

Even before the rate cut the outlook was looking grim by Chinese standards.

Analysts forecast in a Reuters benchmark poll in May that China would deliver its weakest quarter of growth in three years in the second quarter at 7.9 percent. It would also mark the sixth straight quarter of slowing growth.

They expected 2012 full-year expansion of 8.2 percent, a pace that industrial nations would envy but would be the weakest outcome for China since 1999.

While the cut to borrowing costs should help in the near-term to shore up the economy, the central bank also gave banks more flexibility to set competitive lending and deposit rates in a step along the path of financial liberalisation.

Credit Suisse analysts said the move though would reduce bank margins by up to 8 basis points. An index of Chinese financial shares in Hong Kong fell 1.0 percent, with China Construction Bank dropping 2.6 percent and Industrial and Commercial Bank of China sliding 2.9 percent.

EXPECTATIONS

Based on Reuters polls earlier this week, fixed asset investment and industrial production numbers for May - two of China's most crucial indicators of activity and job creation - are forecast to show signs of stabilising.

Industrial production was thought to have risen by 9.9 percent in May from a year ago, picking up from a 34-month low in April of 9.3 percent.

Annual growth in fixed-asset investment in the first five months of the year is expected to stay at a decade-low pace of 20 percent, little changed from annual growth of 20.2 percent between January and April.

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