China Cuts Rates in Face of Record Slowdown

China's central bank cut interest rates for the fifth time in four months yesterday in a desperate effort to revive the country's flagging economy as fears over the world recession continue to deepen.

The decision by the People's Bank of China to cut rates by 0.27 points came as Japan announced that exports had fallen to their lowest ever level.

The country's economics minister said he found it "difficult to imagine" that Japan would see an improvement in the near future.

Yesterday's rate cut in China, which follows a 1.08 percentage point reduction four weeks ago, was much less than most economists had expected. Benchmark one-year lending and deposit rates are now 5.31% and 2.25% respectively.

"We would have thought that given the US action, and the ... central bank action around the world, the [People's Bank] would have been inclined to go further," said Ken Peng, an economist at Citigroup.

"Apparently they think this will be sufficient to maintain financial stability in the near term."

China's economy has slowed significantly since the collapse of US investment bank Lehman Brothers in September.

The country's factory output grew at a record slow pace for a non-holiday month in the year to November and exports declined for the first time in more than seven years.

Xing Ziqiang, economist at China International Capital Corp, said: "The economy is slowing more sharply than expected and I think that's why the central bank rushed to cut rates again now."

Economists at research group IHS Global Insight predicted China's GDP growth would slow from 11.9% in 2007 to 9.4% this year and 7.4% in 2009.

Thousands of factories have closed as global demand for Chinese exports has continued to wane, leading to protests at rising unemployment.

Workers have clashed with police in protests over unpaid wages. Domestic industries such as property and car sales have suffered in the credit crunch. Japan has been hit hard by falling demand for its cars and consumer electronics products. The finance ministry said yesterday that exports fell at a record pace last month, staying in the red for a second month for the first time since 1980.

Global exports slumped 26.7%, taking the country's trade deficit to ¥223bn (£22bn), while those to the US fell almost 34%. Both falls were the sharpest since current trade calculations were introduced in 1980.

Exports to Asia, which had held up in the early days of the financial crisis, have now started to follow those to the US and Europe, falling 26.7% in November. Exports to China, where demand for semiconductors and consumer electronics helped lift Japan out of its last recession, dropped 24.5%, their biggest fall since 1995.

When economics minister, Kaoru Yosano, was asked whether there was any end in sight to the gloom, he replied: "God only knows.

"Now is not the time to talk about a bright tomorrow. For now we are focused on how to present a bleak tomorrow."

The government's monthly economic report was equally pessimistic, warning that the rapid fall in production threatened to usher in an era of high unemployment.