Interpac Business and Migration Solutions Melbourne Australia

(December 1, 2011)

More money is being made available for lending for the first time in three years as China "fine-tunes" its monetary policy to sustain growth amid expectations of cooler inflation.

The central bank announced a lowering of reserve requirements for banks by 0.5 percentage points yesterday, the first cut since December 2008, after data showed an outflow of foreign capital in October and easing inflation in three consecutive months from 6.5 percent in July to 5.5 percent in October.

The change in the ratio, effective from next Monday, is expected to add between 350 billion and 400 billion yuan (US$54.8 billion and US$62.7 billion) liquidity to the banking system. The reserve requirement ratio will be 21 percent for large banks and 17.5 percent for smaller ones.

China hasn't raised interest rates since July, the longest pause since increases began in October last year. The last interest-rate cut was also in December 2008, during the global financial crisis.

The People's Bank of China joins the central banks of Brazil, Indonesia, Thailand and the eurozone in easing monetary policy, a reflection of growing alarm that the eurozone debt crisis could drag the global economy back into a recession.

The decision came a day ahead of the release of China's official purchasing managers' index for November, a main measure of industrial activities, which is widely expected to fall from the previous month.

Six of 13 financial institutions surveyed by Reuters expected China's industrial activities to contract in November from the same month of last year due to China's tight monetary policies and sluggish economic growth overseas.

China has raised reserve requirements six times and interest rates three times this year to tame inflation, which has led to the country's slowest economic growth since 2009, with gross domestic product increasing 9.1 percent in the third quarter.

"The loss of foreign capital in October has resulted in a shortage of money for the banks, and the central bank is aiming to resume liquidity," said Guo Tianyong, a professor with the Central University of Finance and Economics. "But the decrease is not an indication of a change in direction for China's monetary policies."

He said he expected monetary policies to remain prudent due to still high inflationary pressure and the needs to control house prices.

His view was echoed by Fudan University professor Sun Lijian, who said the decrease in reserve ratios was temporary and warned of a return of inflationary pressure after the US and European governments offer bailouts to ease their debt crises and boost the economy.

But Qu Hongbin, a Hong Kong-based economist for HSBC Holdings, said more reserve ratio cuts may follow, while interest rates may remain unchanged until inflation is below 3 percent. "We see this surprise move as the beginning of monetary easing," Qu said.

Stephen Green, China economist at Standard Chartered Bank in Hong Kong, told Reuters: "This is a big move - this is easing. It's a clear signal that China is on a loosening mode. The next move will be another reserve requirement ratio cut in January."

Premier Wen Jiabao said in October that the government would fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate.

Source from Shanghaidaily.com