November 30, 2011

China Cuts Reserve Ratio

Pressure on credit spurs move

In a sign that China's red-hot economy is cooling down, for the first time in three years Beijing took the brakes off. China's central bank cut the required reserve ratio for the country's banks, in an action taken Wednesday that was designed to ease credit and boost economic activity.

Reuters reported that the RRR was cut by 50 basis points, from a record high of 21.5% to 21.0%. Previously the RRR had been increased by 25 basis points at a time as China sought to curb the possibility of a hard landing. According to the central bank's website, the move is to take effect on Dec. 5. It is hoped that the drop in RRR will open up lending to small companies that have been feeling the pinch as banks held onto cash reserves rather than make loans.

Shi Chenyu, economist with the investment banking unit of Industrial and Commercial Bank of China, said in the report, "It's a surprising move—the market was not expecting the central bank to [cut RRR] so fast. The move sends a clear message that the central bank is ready to relax its policy stance."

Markets reacted positively to the news, which was such a surprise that on Tuesday Chinese stocks had suffered their worst one-day loss since August due to the belief that the bank would not take such an action. European markets rose after the news as well, reversing some earlier losses, with the news at least partially compensating for downgrades in big banks' credit ratings announced by Standard & Poor's on Tuesday and general debt crisis woes throughout the eurozone.

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