China moves to ease credit crunch; more bank reserve cuts seen

China took its first step towards freeing up more funds this year, via a 50-basis point cut in the banks’ reserve requirement, to promote economic growth now that inflation has started to taper off, analysts said on Monday.

More such measures are expected to ensure the domestic economy will continue to grow at a healthy pace despite a slackening of exports.

Effective 24 February, the reserve requirement ratio for banks, or that portion of deposit that must be parked with the central bank, will be reduced to 20.5% for major financial institutions and to 17% for small and medium-sized financial institutions, the People’s Bank of China (PBoC) announced over the weekend.

The move would make available yuan (CNY) 400-500bn ($63bn-79bn) for lending, further easing a domestic credit crunch, analysts said.

The PBoC may issue three to four more cuts in the bank reserve requirements for the rest of the year, said Lian Ping, chief economist at China’s Bank of Communications.

After nearly three years of keeping a tight rein on credit, China started to adjust down the bank reserves in December, with a quick follow-through this year.

A domestic credit crunch that ensued in China after the lending binge in 2009, which fuelled inflation, has stifled trades, including those of petrochemicals, as players face difficulty tapping funds.

China, the world’s second biggest economy, is a major importer of petrochemical products in Asia, with the bulk of its manufactured end-products meant for exports.

The country is taking a different tack in its monetary policy, now that inflation was brought back to manageable level of 4.5% in January this year, from a high of 6.5% in July 2011.

It must be mindful that its economic growth has also steadily decelerated last year, ending with a fourth-quarter expansion of 8.9% - the lowest on record for two and a half years. For the whole of 2011, China’s average GDP growth was 9.1%.

This year, a further slowing down of growth can be expected, with exports expected to take a heavy beating from the eurozone debt crisis.

Global financial stability watchdog – the International Monetary Fund (IMF) – has revised down its 2012 growth forecast for China to 8.2% from 8.9%.

China may pursue a more loose monetary policy by adjusting down the reserve requirement ratio of banks, but is unlikely to cut its key interest rate in the interest of stability, analysts said.

“The room of loosening monetary policy is limited this year. It is not possible to cut interest rates in the near term,” said Lu Zhengwei, chief economist at China’s Industrial Bank.

($1 = CNY6.30)