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Capital Economics Sees Further China Deposit Rate Falling to 3%

Mark Williams, chief Asia economist at Capital Economics Ltd. in London, comments on China’s first interest-rate cut since 2008, in an e-mailed note to clients.

The one-year deposit rate will drop to 3.25 percent from 3.5 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will fall to 6.31 percent from 6.56 percent. Banks can offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

“The move is clearly a response to a string of disappointing economic data and, in particular, the weakness of credit growth in the wake of government stimulus calls. Many harbor doubts about the wisdom of another credit-fueled stimulus, but the government’s overriding objective is to ensure that the economy is not too fragile in the final months before the leadership transition.

‘‘We believe that the rate cut will be effective in meeting the short-term objective of getting credit and the economy moving. Banks’ failure to extend more than a trickle of new loans has spooked policy makers and they have apparently concluded that the level of interest rates has become a constraint on loan demand.

‘‘We expect the benchmark 12-month lending rate to finish 2012 at 6.06 percent and the deposit rate at 3.00 percent, both down by a further 25 basis points down from today.’’

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