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 co-ordinated action by major central banks, including the Federal Reserve and the European Central Bank, to ease credit strains in world markets buffeted by the eurozone 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 December 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.
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 eurozone, among others, in easing monetary policy, a reflection of the alarm that the eurozone debt crisis and a sluggish US economy could drag the world back into a recession.
China's unusually high reserve rate requirements have made life difficult for private-sector companies. While they account for 75 percent of urban employment, they find it far harder to secure bank loans than politically well-connected state-owned enterprises.
Worried about a destabilising jump in unemployment, Beijing is eager to lend them a hand. In recent weeks, China has seen a spate of major strikes in its export powerhouse in the Pearl River Delta. Ten of 19 analysts in a Reuters poll on Tuesday had predicted China would cut its bank reserves in December by 50 basis points. Eight had expected a move in the first quarter of 2012 and one not until the second quarter. As recently as the middle of 2011, China was still tightening monetary policy to combat stubbornly high inflation, which rose in July to a three-year high of 6.5 percent.