The central bank said Wednesday that commercial banks would be allowed to keep a slightly lower percentage of their deposits as reserves at the central bank. The change, which will take effect on Monday, means that commercial banks will have more money available to lend, which could help to rekindle economic growth and a slumping real estate market.
Real estate developers, small businesses and other borrowers have been complaining strenuously in recent weeks of weakening sales and scarce credit. Prices have dropped up to 28 percent for new apartments in some Chinese cities this autumn, real estate brokers have been laying off thousands of agents as transactions have dried up, and export orders have slumped.
The Chinese move was a particular surprise because the central bank usually announces moves on Friday evenings, to allow banks and markets plenty of time to digest the news.
The Chinese announcement came after the Shanghai stock market had slumped 3.3 percent on Wednesday, its worst one-day loss in four months, on worries that the government might not act.
The reduction in the so-called reserve requirement ratio came after the central bank had increased the same ratio six times this year, and raised interest rates three times. The monetary policy moves earlier this year had been aimed at curbing inflation, which persists but appears to have been replaced by weakening economic growth as the top worry for policymakers.
Monetary policy changes are made not by the country’s central bank but by the State Council, the country’s cabinet. Shifts in the broad direction of policy are usually made only with the approval of the Standing Committee of the Politburo of the Chinese Communist Party – the nine men who really run China.
Analysts said that the central bank’s decision to announce a change in reserve requirements instead of quietly nudging state-controlled banks to make more loans showed an important political decision had been made.
“The public nature of this move – a move that would have gone through the State Council – is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation,” wrote Stephen Green, a China economist at Standard Chartered Bank, in a research note. “This is a big move, it signals China is now in loosening mode.”
The People’s Bank of China, the country’s central bank, cut the reserve requirement ratio by 0.5 percentage points as of Monday, to 21 percent for large banks and to 19 percent for smaller banks.
The Chinese move was such a surprise that one of the 15 members of the central bank’s monetary policy committee, Xia Bin, had just said at a seminar in Beijing on Wednesday morning that China would only “fine tune” its monetary policy and would maintain an overall stance that he characterized as “prudent.”
Those remarks triggered the slump in share prices during Wednesday’s trading in Shanghai; the stock market there had been closed for several hours by the time the central bank announced its policy reversal.
It was unclear if the Chinese move had been coordinated with the six central banks in the United States, Europe and Japan that agreed an hour later to provide more liquidity to world financial markets.
The United States Treasury notifies the Chinese government of policy moves by the Obama administration, so as to reassure the United States government’s largest foreign creditor. But economists say that there has been little international coordination of monetary policy by China’s central bank.
The People’s Bank of China is considerably more secretive than central banks in the West and particularly wary of foreign governments because of years of international pressure to allow faster appreciation of the renminbi, China’s currency.
The Chinese central bank provided no explanation for its move on Thursday evening. The one-sentence statement only said, “The People’s Bank of China decided to cut financial institutions’ renminbi deposit reserve ratio by 0.5 percentage points.”
Article source: http://feeds.nytimes.com/click.phdo?i=f92ba141d1e22e42d3c10afc2ff5ca68
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