China makes biggest cut in interest rates for 10 years to allay crisis

The Chinese government made its biggest interest rate cut for more than 10 years yesterday in an attempt to weather the global economic storm eroding demand for the country's exports.

The central bank slashed the one-year loan rate by 108 basis points to 5.58 per cent and cut the deposit rate to 2.52 per cent. The government also lowered the reserve requirement rate for banks in the hope of boosting liquidity and encouraging growth.

The measures are designed to smooth the effect of falling demand for the country's manufactured goods from recession-hit developed eco-nomies across the world.

The move says as much about Beijing's view of the situation as the $586bn (£382bn) stimulus package – including tax cuts and major infrastructure investments – put together earlier this month.

But economists say that simply trying to sustain manufacturing output is not necessarily the answer.

Diana Choyleva, a director at Lombard Street Research, says the key to recovery is to encourage Chinese citizens, who currently salt away some 50 per cent of the country's GDP in inefficient national savings schemes, to replace export-led demand with the homegrown, consumer variety.

"Just cutting rates is not a good plan because, although it might make for a short-term bounce, it is supporting the existing imbalance in the economy rather than addressing the root of the problem," Ms Choyleva said.

"The fastest solution would be to let Chinese people search for the highest return to invest their savings rather than making them invest inefficiently – either domestically or in the casino of the country's stock market."

Earlier this week, the World Bank cut its forecasts for China's economic growth from 9.8 per cent to 9.4 per cent for this year, and from 9.2 per cent to 7.5 per cent in 2009.

The country's economy has expanded at double-digit rates for the past five years, including a massive 11.9 per cent boost in 2007.