China cuts bank reserves in policy shift to lift economy

Wed Nov 30, 2011 10:08am EST
 
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By Zhou Xin and Kevin Yao

BEIJING (Reuters) - China's central bank cut reserve requirements for commercial lenders on Wednesday for the first time in three years, a policy shift to ease credit strains and shore up an economy running at its weakest pace since 2009.

China's policy change came just hours before coordinated action by major central banks, including the Federal Reserve and the European Central Bank, to ease credit strains in world markets buffeted by the euro zone debt crisis.

Official concern is rising that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two-year crisis. Global markets rallied on the combination of central bank news.

China's central bank said on its website it lowered the amount of cash that banks have to set aside by 50 basis points, effective Dec 5. That cut the reserve requirement ratio (RRR) for the biggest banks to 21 percent from a record high 21.5 percent, freeing up funds that could be used for lending.

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

The cut releases between 350 billion yuan and 400 billion yuan ($54.8 billion to $62.7 billion) into the banking system, analysts estimated.

The People's Bank of China (PBOC) joins the central banks of Brazil, Indonesia, Thailand and the euro zone, among others, in easing monetary policy, a reflection of the alarm that the euro zone debt crisis and a sluggish U.S. economy could drag the world back into a recession.

CREDIT CRUNCH   Continued...