Yes, the US Fed cut rates by 0.50%, as expected, but the really scary rate cut came from China’s central bank a few hours earlier last night.

The People’s Bank cut its key lending rate by the now usual 0.27% for the third time in two months, a sure sign the Chinese Government is now more concerned than ever at the pace of the slowdown in activity in the country. The Financial Times claimed the markets had “taken heart” from the cuts but for us in Australia, it’s far from heartening.

China’s still strong growth of around 8% next year is supposed to keep the region and Australia from recession (periods of negative growth). But three rate cuts in two months is not a strong show of confidence from the Chinese authorities that growth is still on track. For Australia and Australian resource companies in particular, it’s a big warning sign.

Demand and prices are all going to be lower: this is what much of the price falls for resource stocks in recent weeks have been all about.

Chinese miners and metals processors, such as aluminium, nickel, copper, lead, and zinc are all continuing to cut output. Vale, the big Brazilian mining group, revealed last week it was cutting production at a nickel processing facility in China and slowing the opening of two new mines until well into 2009.

Jinchuan, China’s biggest nickel group and a major investor in the metals sector here, revealed a 17% cut in output, but Chinalco, the biggest aluminium group in China, said its cut would be 18%. Chinalco had already curtailed output, as had Jinchuan in the third quarter, partly because of the Olympics. Chinalco has invested in Rio Tinto (the shares are tied up in the failure of Lehman Brothers) but the company would sustain huge losses if it sold now.

Baosteel, the major steel producer, has been quoted once again saying demand from cars, whitegoods and construction is falling. The Economist reported that FerroChina, a big steel maker, had gone bust, as had a larger toymaker called Smart Union. A host of smaller steel and toy companies are either cut output or gone out of business, as have hundreds of shoemakers in Guangdong province this year.

China’s central bank cut its key one-year lending rate from 6.93% to 6.66%.

The People’s Bank of China said the deposit rate drops from 3.87% to 3.60% (still better than the stockmarket). The changes are effective from today. The three rate cuts totalling just over 0.80% are a substantial reduction by Chinese standards, and the best sign so far that the economy is slowing faster than the official rate would indicate.

That was an annual 9% in the September quarter, down from 11.9% for 2007; growth has been slowing in China for five quarters in a row.

For Australia it’s a far more important indicator than the Fed’s 0.50% cut to 1%. That’s equal to the lowest ever and last seen in 2002-2003 in the wake of the 2001 recession and corporate collapses and when the seeds for the current enormous crisis were being sown by the surge in cheap and easy credit in the US and Japan in particular.

But there’s one paragraph in the Fed’s statement that illustrates the fate awaiting the US economy and consumers and businesses.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

All that’s missing from that is the “R” word. There will be a lot of those tossed about tonight and tomorrow after the US Government releases its first estimate of third quarter economic growth: the news won’t be good. Bloomberg and Reuters surveys are forecasting a contraction of an annual rate of 0.5% in the quarter (some higher, some lower).

The above description from the Fed has allowed for no positive news anywhere in the economy at all: tonight we will see slumping consumer demand, construction, business investment, car sales, industrial production and even sagging service industries.

Then tomorrow it’s the chance of the Bank of Japan to shine with a rate cut of 0.25%.

On October 8, when the Fed, ECB (which meets next week), Bank of England and three other central banks cut rates by 0.50% together, Japan’s central bank merely issued a statement of support because its key rate was 0.50%. And then, half an hour before the running of the Melbourne Cup next Tuesday, the RBA will reveal a rate cut.

Rory Robertson of Macquarie reckons it will be 0.50%: “From the RBA, I’m still expecting 100bp worth of further cuts (to 5%) before Christmas, in 50bp lots in November and December.”

Let’s hope he’s right.