China frees up $US200b for lending

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For the second time since February, China's central bank on Sunday cut the reserve requirement ratio for banks, or the amount of their deposits that they must maintain rather than lending. Photo: Bloomber

For the second time since February, China’s central bank on Sunday cut the reserve requirement ratio for banks, or the amount of their deposits that they must maintain rather than lending. Photo: Bloomber

In the latest sign that economic growth may be slowing faster than the leadership in Beijing anticipated, China on Sunday freed up roughly $US200 billion ($250 billion) for new lending.

The country’s central bank sharply reduced the amount of money that banks are required to keep on reserve, a widely expected stimulus measure devised to pump more money into the economy. But the move also comes as China’s securities regulator is trying to curtail new debt-driven investments in the country’s already frothy stock market.

Chinese policymakers are dealing with a financial conundrum. Overall economic growth is slipping, which argues for looser monetary policy.

But at the moment, any new liquidity risks are being diverted to the country’s soaring share markets. Shanghai’s main index more than doubled over the past 12 months, driven by an influx of inexperienced new investors and rising levels of borrowing in order to bet on shares.

Against this backdrop, the central bank and securities regulator in recent months have appeared to take coordinated action.

On Friday, the securities regulator moved to curtail the sources of new funding for margin financing – or buying stocks on borrowed money. The practice has been a huge driver of the recent market rally, and one that the regulator took aim at in January.

That gave the central bank room to free up broader monetary policy by reducing the chances that new bank funding would find its way into the stock market.

For the second time since February, China’s central bank on Sunday cut the reserve requirement ratio for banks, or the amount of their deposits that they must maintain rather than lending. The ratio for the largest banks was reduced by a 1 per centage point, to 18.5 per cent – the biggest such decrease in seven years. The central bank has also cut benchmark interest rates twice since November.

Policymakers are responding to the slowing economy. Figures released last week showed the growth rate had decelerated to 7 per cent in the first quarter, its slowest pace in six years.

“The move was widely expected, given last week’s weak data releases,” Qu Hongbin, an economist at HSBC in Hong Kong, wrote Sunday in a research note. “However, the magnitude of the cut – the largest since November 2008 – signals Beijing’s heightened concerns over the growth slowdown,” he said.

Qu calculates the move could free up 1.2 trillion renminbi for new lending.

Still, the cut does not automatically translate into new lending. China’s banks have grown wary of issuing loans to smaller or riskier borrowers, given the country’s slowing growth. And the banks’ profitability has come under pressure as Beijing has pursued financial overhauls, including steps toward full liberalisation of interest rates.

Most analysts expect that China will, in the coming months, make further reductions to reserve requirements for banks and to benchmark interest rates. But doubts remain over whether these steps will be enough to achieve the official target of about 7 per cent growth for the full year.

Despite easing moves so far, China’s slowing growth has meant that Beijing has been confronted by “rising skepticism about the ability of the government to generate an economic recovery as it typically did in the past,” Goldman Sachs analysts wrote in a research note Sunday.

The new rate reduction, and lower overall borrowing costs in recent weeks, “marks a new stage in policy making with a more aggressive stance,” they wrote. “We believe other loosening measures are likely to become more aggressive as well.”

Courtsy: New York Times

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