China acts to boost loans, bolster flagging economy

Sat May 12, 2012 12:52pm EDT
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By Fayen Wong

SHANGHAI (Reuters) - China's central bank cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to head-off the risk of a sudden slowdown in the world's second-largest economy.

The People's Bank of China delivered a 50 basis point cut in banks' reserve requirement ratio (RRR), effective from May 18, the third cut in six months and one that investors had called for after data on Friday showed the economy weakening, not recovering, from its slowest quarter of growth in three years.

Industrial production weakened sharply in April and fixed asset investment - a key growth driver - hit its lowest level in nearly a decade, surprising many economists who thought Q1's 8.1 percent annual rate of growth marked the bottom of a downswing and were expecting signs of recovery in Q2 data.

"The central bank should have cut RRR after Q1 data. It has missed the best timing," Dong Xian'an, chief economist at Peking First Advisory in Beijing, told Reuters.

"A cut today will have a much discounted impact. So the Chinese economy will become more vulnerable to global weakness and the slowing Chinese economy will in turn have a bigger negative impact on global recovery. Uncertainties in the global and Chinese economy are rising," he said.

The domestic production and investment data had followed hot on the heels of weaker than forecast trade data, with the annual rate of export growth around half the level expected and growth in imports grinding to a halt on a nominal basis in April, underlining China's vulnerability to weakness in global demand for goods produced in the country's vast factory sector.

Bank lending in April was also sharply below forecast at 681.8 billion yuan ($108.04 billion), missing the 800 billion consensus call and raising doubts about whether Beijing had policy settings slack enough to keep the economy expanding.

"It confirms our view that the economy was not able to sustain its momentum on current policy and policy needs to be loosened," said Ken Peng, an economist with BNP Paribas.   Continued...