From Asia Times, December 9:
Threatening the private sector and scaring foreign investors is part of a broad rebalancing strategy
The People’s Bank of China (PBOC) is encouraging Chinese banks to lend more to businesses and consumers by cutting the proportion of deposits that they have to hold as reserves by 0.5 percentage points to an average of 8.4% from December 15.
It follows a similar cut in July and is an interesting counterpoint to western central banks such as the Bank of England and Federal Reserve. They are talking about tightening monetary conditions to dampen inflation by raising interest rates and reducing quantitative easing, which effectively creates more money to stimulate lending.
So why are the Chinese loosening and what effect will it have?
China’s growth headache
The official reasoning is to ease credit conditions in the face of a slowing property sector and a disappointing annual GDP growth rate of 4.9% in the third quarter, down from 7.9% in the second quarter.
The cut in the bank reserves minimum, which is known as the required reserve ratio or RRR, is expected to release 1.2 trillion yuan (US$189 billion) of extra money into the economy.
This aims to bolster demand within China so that the modest government growth target of 6% in 2021 will be met. It could achieve that short-term goal by stimulating demand if credit expands and gets to the right places. And, unlike the west, inflation is less of a problem in China because the money supply has been growing slowly.
Despite the hype about China bouncing back from its lockdown experience, the pandemic has not helped its economic situation. Like the rest of the world, it has encountered major supply disruptions. Some have been domestically driven but most are global, with shortages of electronic chips, coal, steel and shipping capacity causing power shortages and shutdowns.
But these are short-term problems that may dissipate as the pandemic eases. Unfortunately, there are also long-term issues that tinkering with the RRR will not solve....
....MUCH MORE
