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China eases monetary policy with reserve ratio cut

The Bank of China branch is seen in New York September 30, 2011.


China's central bank is signalling a shift in policy by loosening lending requirements as the world's second-largest economy slows down.

The People's Bank of China cut the required reserve ratio for all Chinese bank lenders by 50 basis points, marking the first time it has officially eased monetary policy for nearly three years.

The move shows policy makers believe the persistent inflation that has plagued the investment and export-driven Chinese economy has been tamed. But it also implies deep concern about a significant slowdown as manufacturers, steel producers and property developers in China brace for fallout from the European debt crisis and a weakening global economic outlook.

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"Economic activities [in China]are slowing down quite meaningfully now," Na Liu, the founder of CNC Asset Management Ltd. and China strategy adviser to Scotia Capital, said in a report.

Indeed, government statistics and anecdotal evidence suggest China's bubbly property market has stalled and could reduce demand for commodities produced by Canadian resource companies. In November, monthly home sales in the top 10 cities in China skidded 38 per cent from last year and average home prices in China's 70 largest cities are declining.

Adding to commodity price pressures, Chinese steel production recently dropped to levels lower than the output registered during China's Spring Festival, an annual two-week national holiday that traditionally marks the lowest production levels of the year.

In anticipation of an economic slowdown, Chinese stocks have been in freefall. Ahead of the bank reserve requirement cut Wednesday, the Shanghai Composite index dropped sharply.

"Judging by recent developments in China's real estate markets, we think the economic slowdown might last some time. In our view, the reserve ratio cut is meant to cushion the downside of the Chinese economy, rather than reaccelerate it," Mr. Liu said.

The timing of the cut was earlier than expected. Most economists and analysts had forecast the central bank to begin easing in January.

China has become a critical engine of global economic growth in recent years, quickly shaking off the financial crisis of 2008 and powering ahead to restore demand for minerals, oil and other commodities.

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China's quick recovery was aided by a massive stimulus package worth about $570-billion (U.S.) that spurred industry and consumer demand but also contributed to inflation and a runaway property market that many believe is an asset bubble.

The most recent quarterly GDP figures show China's economy grew by an impressive 9.1 per cent in the third quarter from a year earlier, down modestly from 9.5 per cent in the second quarter.

China's central bank is now clearly focused on maintaining growth, rather than tackling inflation. By easing constraints on bank lending, the reserve ratio cut is equivalent the injection of about $63-billion into the Chinese economy, London-based Capital Economics said in a report.

"The People's Bank could have achieved the same end of loosening constraints on credit growth quietly through its open market operations. The fact that it chose to act in this more public way is a signal not only that policy makers are loosening, but also that they want to be seen to be doing so," Capital Economics said.

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