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China says downturn deepens, but rate cut lifts shares

China warned on Thursday its economic downturn was deepening with the spread of the global financial crisis, raising the specter of job losses and social unrest in the world's most populous nation.

The warnings from the country's top planner came a day after China's central bank slashed interest rates by the biggest margin in 11 years to shield its economy from the worst global downturn in decades.

The crisis that began last year with the collapse of the US housing market spread around the world, bringing several top financial institutions to their knees and pushing the United States, Japan and Europe into recession or to the brink of it.

China's economy, the world's fourth biggest, is still expanding, but the growth engine is sputtering, hit by a sharp drop in demand for its exports. This quarter is expected to be its worst in three years.

“The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November,” Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.

The State Information Centre, a government think-tank, forecast annual growth would slow to 8% this quarter from 9% in the third quarter, still a respectable figure but a far cry from blistering double-digit growth rates recorded in the past five years.

With factories closing by the thousands, Chinese officials have grown increasingly concerned in recent weeks that slowing growth may threaten the stability that the ruling Communist party craves for its 1.3 billion people.

“Excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest,” Zhang warned.

Zhang said Wednesday's 108 basis point rate cut would reinforce the impact of the government's 4 trillion yuan stimulus package unveiled on November 9. The package that aims to boost domestic demand over the next two years and offset the slump in exports, should boost growth by about 1 percentage point each year, he said.

China's unexpectedly big rate cut helped Asian stock markets chalk up a fifth gain in a row, even as India, Asia's other new economic power, was shaken by militant attacks in the financial capital Mumbai that killed at least 100 people.

US markets are closed for Thanksgiving on Thursday after a rare four-day gaining streak in the S&P 500 stocks index.

In a sign how essential was China's success for the rest of the world, top global miner BHP Billiton cited a drop in China's demand for iron ore when it painted a gloomy outlook for its business and defended its decision to drop a $66 billion bid for rival Rio Tinto.

Aggressive interest rate cuts and trillions of dollars in financial sector bailouts and stimulus packages have been the order of the day since the financial crisis culminated with the collapse of Lehman Brothers in September, freezing lending and spreading the pain to consumers and businesses.

South Korea, which has already pledged more than $150 billion in debt guarantees, financial sector aid, tax cuts and extra spending, on Thursday offered to do more to shield Asia's fourth-biggest economy from global headwinds. The government plans to buy bad debt from banks and said it would also tap a $30 billion swap line with the US Federal Reserve to supply scarce dollars.

On Wednesday, the European Commission called for an EU-wide fiscal stimulus worth €200 billion ($260 billion) in an attempt to stave off recession in the 27-nation bloc.

National packages already announced by countries including Germany, Britain, Spain, the Netherlands and Hungary amount for about half of the total, raising questions over how much of a boost it will really give the EU economy.

European Central Bank policymakers made plain that the ECB was ready to do its part and cut interest rates again

ECB governing council members Christian Noyer and Axel Weber said there was room for lower rates given an expected drop in euro zone inflation below the bank's 2% target next year. ECB President Jean-Claude Trichet was more cautious but also left the door open for another rate cut at the December 4 policy meeting in Brussels.

Analysts polled by Reuters expect the ECB to cut its benchmark rate by another half a point to 2.75%, its lowest in more than two years.

Earlier this week the Fed unveiled a $800 billion plan to buy mortgage-related debt and back consumer loans, bringing the total potential rescue bill to as much as $8.3 trillion, more than half of the US gross domestic product.

The moves come against the backdrop of a steady flow of grim economic data and corporate profit warnings and amid market anxiety whether and when the rescue efforts would lure consumers, now gripped by fear for their jobs, back to shops.

On Wednesday, data showed US consumer spending fell at the steepest rate in more than seven years in October and durable goods orders tumbled at twice the rate economists expected.

In Europe, euro zone business and consumer sentiment surveys due later on Thursday are expect to show a worsening of economic and business conditions in the 15-member single currency area.

In yet another sign that no one is spared the pain, Japanese electronics maker Panasonic Corp is likely to cut its annual operating profit forecast by a third, according to a source familiar with a matter. (Reuters)