China’s central bank cuts reserve ratios to boost sagging economy

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In an unexpected policy shift, China’s central bank said Wednesday that it would cut the amount of money banks must hold in reserve, a move aimed at boosting liquidity in the country’s slowing economy.

The step comes after a year of tightening to rein in inflation and growing debt levels in an economy that still grew 9.1% from a year earlier in the third quarter.

‘Today’s surprise reserve ratio cut marks the start of an across-board easing policy for China,’ Qu Hongbin, an economist for HSBC, wrote in a note Wednesday. ‘This, plus tax cuts and additional fiscal spending should help keep China on track for a soft-landing.’

The People’s Bank of China said it would lower the so-called reserve ratio requirements of large commercial banks by 0.5 percentage points starting Dec. 5., the first such move since December 2008.

The move allows banks to inject more credit into the economy, which has been feeling the effects of declining export orders from the West and plunging property transactions because of government cooling measures.

‘More important though is the signal this gives to the markets and to investors,’ Mark Williams, chief Asia economist for Capital Economics, wrote in a note to clients Wednesday. ‘The fact that [the central bank] chose to act in this more public way is a signal not only that policymakers are loosening but that they want to be seen to be doing so.’

The cut suggests policymakers are confident that inflation will taper off in the coming months. The nation’s inflation rate grew by 5.5% in October from a year earlier, well below a three-year peak in July of 6.5%.

In the last year, the central bank has raised reserve requirement ratios six times and the benchmark interest rate three times.

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-- David Pierson in Beijing
Twitter.com/dhpierson