Rumours of another bank interest rate cut have swirled around China's financial markets in recent days, driving prices of domestic A shares and treasury debt contracts sharply higher. Officials of the People's Bank of China, the central bank, declined to comment on the market talk.

"Pressure is mounting for another bank interest rate cut as the economy continues to slow despite official efforts," a banker with Shanghai-based Communications Bank said.

Economic growth has slowed in the past two years, with gross domestic product (GDP) rising 8.8 per cent in 1997 against 9.7 per cent in 1996, mainly due to slack domestic consumer demand and the impact of the south-east Asian financial crisis.

GDP grew 7.2 per cent year-on-year in the first three months of 1998 despite pledges by premierZhu Rongji that China would achieve the 1998 growth target of 8.0 per cent.

Bankers said the slowdown in growth had sown seeds of doubt over whether eight per cent could indeed be achieved. They said Beijing had begun to pressure key economic sectors, especially the banks, to intensify efforts to spur economic growth.

The major difficulties in once again cutting interest rates lay in the fact that rates for Chinese yuan deposits had neared those for foreign exchange and this had increased pressure for a devaluation of the yuan, banking sources said. Annual interest for one-year personal fixed bank deposits currently stands at 5.22 per cent for the yuan, against 5.00 per cent for US dollar deposits. "A further cut in the yuan interest rate could push both institutions and individuals to increase foreign exchange deposits, and that would exert more downward pressure on the yuan," one banker said.

Analysts said that despite repeated promises by Beijing not to devalue the yuan this year, the Chinesecurrency would not be able to avoid a downward trend in 1999 as negative impact from the Asian financial woes deepened. A depreciated yuan would see a resurgence of inflation and Beijing would have little option but to hike bank interest rates if they stood at low levels, they said.

The government has said it aims to keep inflation under a year-on-year three per cent for 1998. "The central government prefers economic and currency stability, and too many interest rate adjustments do not suit that policy," a third banker said.

"So even if there is another cut in bank interest rates, it will be a very small one." The recent rumours of a cut were triggered by a report in the official China Securities newspaper last week. "Can interest rates still be lowered?" the report said. "This kind of possibility exists."

Official price index figures had shown a deflationary pattern in recent months, causing real interest rates on one-year fixed bank deposits to rise to an annual 6.72 per cent, the newspaper said. Thiscompared with negative real interest rates before 1996, when inflation was at record high levels, offsetting higher bank interest rates at that time, it said.