Nov. 26 (Bloomberg) -- China lowered its key lending rate by the most in 11 years, extending efforts to prevent an economic slump less than three weeks after unveiling a 4 trillion yuan ($586 billion) stimulus plan.

The key one-year lending rate will drop 108 basis points to 5.58 percent, the People’s Bank of China said on its Web site today. The deposit rate will fall by the same amount to 2.52 percent. The changes are effective tomorrow.

China‘s economy, the biggest contributor to global growth, will expand at the slowest pace in almost two decades next year, the World Bank forecast yesterday. Manufacturing shrank by the most on record in October as recessions in the U.S., Japan and Europe cut demand for exports and property prices fell at home.

“It underlines the harshness of the economic slowdown,” said Gabriel Gondard, Shanghai-based deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7 billion. “The past six weeks has seen a rapid deterioration in the economic picture.”

The bank lowered the reserve requirement for the biggest banks to 16 percent from 17 percent, effective Dec. 5. The requirement for smaller banks will fall to 14 percent from 16 percent. The central bank also reduced the interest rate that it pays on reserves deposited by commercial banks to encourage lending.

Cabinet Measures

Two hours after the rate cut, China’s cabinet said it was studying extra measures to help struggling companies in the steel, auto, petrochemical and textile industries; to increase key commodity reserves; and to expand insurance for the jobless.

The government will also push ahead with fuel-price and tax reforms to help boost consumption, the cabinet said. A fuel-price cut would be the first in almost two years. The government regulates energy prices to contain inflation, which fell to a 17- month low in October.

China’s stock market was closed when the announcement was made. Earlier the CSI 300 Index rose 0.5 percent, ending a four- day, 6.1 percent decline. The yuan closed at 6.8287 against the dollar from 6.8280 before the announcement.

The cuts are aimed “at ensuring sufficient liquidity in the banking system and to promote steady loan growth so that monetary policy can play an active role in supporting economic growth,” the bank said in a statement.

“There is still ample room to cut rates in the future,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong, who predicted a 54 basis point reduction in December.

Global Recession

China can help cushion the global recession by stoking its own expansion, President Hu Jintao told Group of 20 nation leaders in Washington on Nov. 15 said.

“China, as it promised, is taking a more responsible and leading role,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing.

China, the world’s most populous nation, is targeting growth of 8 percent a year to provide jobs for workers moving to the cities from the countryside. A decline in economic growth to even that level would be tantamount to a recession, said Tao Dong, chief Asia economist with Credit Suisse AG in Hong Kong.

The outlook for jobs next year is “grim”, Yin Weimin, head of the Ministry of Human Resources and Social Security said last week. Two-thirds of small toy exporters closed down in the first nine months of this year, the customs bureau said this week.

Sacked Workers Riots

About 1,000 police and security guards attempted to break up a demonstration as sacked toy company workers overturned a police car, smashed four police motorbikes and broke equipment in the southern Guangdong province yesterday, Xinhua News Agency reported.

The World Bank cut its forecast for China’s economic growth next year to 7.5 percent from 9.2 percent previously. The Organization for Economic Cooperation and Development also lowered its forecast.

China’s economy grew 9 percent, the weakest pace in five years, in the third quarter, slowing from 11.9 percent last year. The slowdown is deepening, after export orders fell last month to the lowest level since 2005 and property price slid.

“The last print on their GDP was 9, but given the near panic you’re seeing on the policy front, they are either fearful it will go well below that or it may be growing much slower than that right now,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said this week.

On Nov. 9, the government announced spending on housing and infrastructure through 2010, pledging “fast and heavy-handed investment” and a “moderately loose” monetary policy. The plan spans housing, rural development, railroads, power grids and rebuilding after May’s earthquake in Sichuan province.

Export and investment growth cooled in October, and industrial production had the smallest gain in seven years.

China contributed the most to global growth in 2007, the International Monetary Fund said in a report in April. It used purchasing power parity calculations, which account for differences in the exchange rates of national currencies.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net;

Last Updated: November 26, 2008 06:56 EST