China Eases Bank Reserve Requirement
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China’s central bank announced today that it will reduce the reserve requirement for banks, a key sign that the government is easing the tight credit controls meant to curb inflation and surging property prices.
Recent data has show that the world’s second largest economy is cooling down. China’s inflation declined sharply in October, export growth has slowed, and HSBC announced yesterday that China’s preliminary purchasing managers’ index fell to 48 points, an indication of a contraction in spending.
China’s central bank announced today that it will reduce the reserve requirement for banks, a key sign that the government is easing the tight credit controls meant to curb inflation and surging property prices.
Recent data has show that the world’s second largest economy is cooling down. China’s inflation declined sharply in October, export growth has slowed, and HSBC announced yesterday that China’s preliminary purchasing managers’ index fell to 48 points, an indication of a contraction in spending.
Related: China sees rapid growth in imports as export growth slows
After years of credit tightening, China is now ready to shield its economy from the spillovers of a global economic slump.
The People’s Bank of China confirmed it lowered the reserve requirement ratio for six rural banks in Zhejiang province, cutting the ratio of funds that need to be set aside with the People’s Bank of China as reserves to 16% from 16.5%, effective Friday. The adjustment rolls back a 0.5% penalty that was levied on the banks following a review last November.
Learn more about bank reserve requirements here.
According to Reuters, a senior Chinese banker said that China could further reduce the reserve requirement for all banks in the first quarter of 2012, adding to speculation that the slowing world demand may lead to further easing in China’s monetary policy.
“There is the possibility of a cut in the reserve requirement ratio in the first quarter, and the tone of macro policy will change during the central economic work conference,” said Huang Jifa, deputy head of investment banking at Industrial and Commercial Bank of China Ltd (ICBC).
The reserve requirement for the country’s biggest banks is at a record high of 21.5 percent.
Credit restrictions have in recent months fuelled a spike in underground lending activity as borrowers turn to informal lenders at high interest rates, after being declined loans by state-controlled banks.
Related: Chinese businesses turning to shadow banks for loans
But Huang dismissed concerns about Beijing’s fiscal health, saying the government owned many large and profitable state companies, and that revenue collected was rising by about a third per year.
However, he was less certain about the slowing property market, where prices fell for the first time this year in October.
“If China’s property prices drop by 30-40 percent, it will bring even more serious problems than excessive home price rises,” Huang said, adding that steep price falls would erode government land reserves and weigh on the broader economy.
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