Analysis: China brings forward easing to stay in step

Thu Dec 1, 2011 12:04pm EST
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By Kevin Yao

BEIJING (Reuters) - As the world's major central banks hurriedly announced measures to ease stresses in global funding markets, China may have felt compelled to bring forward a move to relax policy that it could otherwise have delayed for a few weeks.

China's announcement on Wednesday it was reducing the amount of cash that banks must hold as reserves left no doubt that the world's second-biggest economy was doing exactly as it did in October 2008: joining a global effort by policymakers to stabilize a rattled financial system.

That somewhat surprise move achieved a lot. For Beijing, it was an opportunity to show how big a part of global policy-making China is and the stake it has in the stability of world markets. It helped that China needed to prop up its own economy.

It has also however meant that the timetable for China's hitherto subtle and selective policy easing has been pushed out into the open, and speeded up.

"The timing of the cut is earlier than I expected," said Andy Xie, an independent China economist. "The global coordinated action to ease dollar liquidity by six central banks is probably the trigger for China's move."

China would have cut the reserve requirement ratio for banks eventually. The economy has slowed, inflation has eased and, most worryingly, capital outflows have accelerated.

A Reuters poll earlier this week had forecast the first cut in China's bank reserves would come in December and the consensus was for the ratio to be trimmed 200 basis points from the peak 21.5 percent through 2012. Wednesday's 50 basis points cut has altered those expectations quite significantly.

Kevin Lai, a senior economist at Daiwa Capital Markets in Hong Kong, said he now expected a further 200 basis points in reserves cuts over 2012, more to prevent the economy from crash landing than to drive another boom.   Continued...