China’s new cash reserve ratio goes into effect today. The banks in China would now have to maintain 21% of total deposits in reserve as cash thanks to a 50-basis point cut announced on November 30 by China’s Central Bank.
Last week, the People’s Bank of China joined several central banks across the world, such as The Federal Reserve, The Bank of England and The Bank of Japan among others to shore up global liquidity and restore confidence in the markets. The downward recast comes after three years of tightening.
Emerging economies like China and India have been facing inflationary impact of rising food and commodity prices. Faced with a structural imbalance that high growth can create — higher income levels and more prosperous societies — China’s Central Bank has had to resort to monetary tightness to check demand and ‘overheating.’ New lending in 2011 would most likely touch 7.5 trillion yuan ($1.2 trillion). The year 2012 would see a modest growth in lending.
The Purchase Managers Index (PMI) of HSBC Holdings Plc (HBC) for China’s Services sector fell to 52.5 in November from 54.1 in October – the slowest in three months. China’s official PMI for the non-manufacturing sector touched 49.7 in November, significantly down from 57.7 in October according to the China Federation of Logistics and Purchasing.
China had grown at 9.7% since Deng Xiaopeng’s market reforms in 1978-79. The 2003-07 period saw a step-up: China grew at 11%. In 2010, China emerged as the second largest economy in the world, behind the USA.
The Central Bank’s move to ease the ratio does not come as a surprise. As China goes about re-orienting its growth model from being export-driven (and with a large current account surplus) to domestic demand-focused, the attempt at monetary easing should encourage credit growth and help reinvigorate the economy.
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