With Wall Street in full-blown crisis and its own stock market in tatters, China’s central bank has slashed interest rates for the first time in six years in a sign that the Asian powerhouse may be sputtering.

The startling move — a cut of 27 basis points — appeared to mark a critical policy turning-point for Beijing as it shifts its emphasis to reflect the risks of a global slowdown and trouble for its exports.

Some observers said that the move, which takes the one-year lending rate from 7.47 per cent to 7.20 per cent, may be linked to growing fears in Beijing that the country is on the brink of a severe correction in the Chinese property market.

Analysts at Standard Chartered questioned whether the Chinese authorities had been pushed into the surprise rate cut because they had seen worse data than the rest of the market.

Although price inflation remains, for many Chinese, painfully high at more than 4 per cent, the rate cut suggests that Beijing is squarely addressing the risk of impending economic slowdown rather than the threat of rising consumer prices.

Traders in Hong Kong said that, despite the Lehman Brothers-related turmoil savaging market sentiment around the world, the Chinese central bank’s rate cut might entice bolder domestic Chinese investors to dip back into their market as buyers.

The abrupt cut in the benchmark bank lending rate was a surprise to China’s financial industry and to the markets, both of which had expected the move to come some time next year. It was accompanied by an equally unforeseen one percentage point cut in the reserve requirement for all but the five largest banks.

The cut in reserve requirements reversed dramatically an unbroken run of 18 rises over the past two years aimed at dousing the overheating lending market and absorbing some of the deluge of cash rushing into China’s banking system.

Despite the cut in reserve requirements, benchmark savings rates on one-year deposits were held steady at 4.14 per cent in a decision that banking analysts said could pile considerable pressure on lending margins at most of the country’s banks.

The double gambit amounted to the Chinese Government’s first post-Olympic acknowledgement that the era of turbo-charged growth may be giving way to less frenzied times.

The central bank’s statement avoided mention of the mounting misery on Wall Street and instead explained its move as a measure to “maintain the stable, fast and continuous development of the national economy”.

Economists are divided over just how far and fast China really is slowing down. Bears believe that official estimates of GDP already overstate the pace of growth, while optimists think that a combination of domestic consumption and investment will significantly blunt the worst of the slowdown.

Economists have a mixed bag of data to work from and parts of it are notoriously manipulated. The property market, on the other hand, is sending out increasingly unambiguous signals and price declines could, say real estate analysts at JPMorgan, spread from Beijing to Shanghai and other leading cities.

Growth rates for both exports and urban income are also down substantially from last year — the latter has tumbled from 14.2 per cent in the first six months of 2007 to only 6.3 per cent in the equivalent period this year. Meanwhile, non-energy industrial profits continue to surge ahead, along with retail sales.

Reined in

Sept 28, 2007 Central bank and China Banking Regulatory Commission say that they will ban banks from lending to developers found to be hoarding land

Dec 11 Central bank orders banks to scrutinise mortgage borrowers more closely

Jan 16, 2008 Proportion of deposits banks must hold in reserve raised for the eleventh time since the start of 2007 to keep a flood of liquidity from entering the economy

June 7 Central bank raises the amount that lenders must hold in reserve by a full percentage point, the fifth increase of the year

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