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China, in Surprising Shift, Takes Steps to Spur Bank Lending
By KEITH BRADSHER
Published: November 30, 2011
http://www.nytimes.com/2011/12/01/business/global/china-reverses-economic-policy.html?hp
HONG KONG — China's central bank, in a surprise move on Wednesday, shifted its economic focus from fighting inflation to stimulating growth by freeing the nation's commercial banks to lend more money.
The bank's move was separate from the subsequent announcement by central bankers in the United States, Europe and Japan that they would pump more dollars into the European banking system. And Western officials said Beijing's move was not done in coordination with theirs.
Still, China's motive was similar: to keep credit flowing through the financial markets.
For more than a year, the Chinese central bank tried to squeeze the country's banking system in hopes of restraining inflation. Its action on Wednesday's indicated that China's government feared the country's growth engine was starting to falter.
Real estate developers, small businesses and other borrowers have complained strenuously in recent weeks of weakening sales and scarce credit. Prices have dropped up to 28 percent for new apartments in some Chinese cities this autumn, and real estate brokers have laid off thousands of agents as transactions slowed. Meanwhile, export orders have slumped, particularly those from Europe.
Beijing's action is a technical one. It allows commercial banks to slightly reduce the percentage of their deposits that they must keep on reserve at the central bank. But the change, which will take effect Monday, means that commercial banks will have more money available to lend, which could help rekindle economic growth and help prevent a disastrous burst of China's real estate bubble.
"This is a big move — it signals China is now in loosening mode," Stephen Green, a China economist at Standard Chartered Bank, wrote in a research note Wednesday.
China's economic growth was the envy of the world until very recently. And even though the country's economy grew in the third quarter at its slowest annual pace in nearly two years, that growth rate was still strong: 9.1 percent in July to September, compared with a year earlier.
But a growing number of Chinese economic indicators are flashing warnings nonetheless. Thousands of Hong Kong-owned factories have closed in southern China this year as Chinese labor costs have risen, the Chinese currency has gradually appreciated against the dollar and export orders have slackened.
On Thursday, the Chinese government plans to release its latest monthly survey of purchasing managers, which will be an important signal on the state of the economy. The survey is tracked as an index, with a reading below 50 suggesting a slowing economy, and it is widely expected to show the index dipping below 50 for the first time in more than two years.
Despite signs of an export slowdown, many economists say China's currency, the renminbi, is still artificially low compared with the dollar. That, they say, is a result of Beijing's long-standing policy of buying dollars in international currency markets to depress the renminbi and keep the nation's exports cheap.
The move that the central bank announced Wednesday would make it more difficult for China to maintain that policy. That is because the central bank, the People's Bank of China, makes its dollar purchases with the money it forces the commercial banks to keep on reserve. By reducing those reserve requirements, the People's Bank will have less money to spend on currency intervention.
But economists said they saw signs in the last month that the People's Bank had less need to limit the renminbi's value, anyway. Speculation in the currency by foreign investors — one factor that could force it higher — has been dissipating as investors find more pressing uses for their money.
Until recently, much of the slowdown in the Chinese economy was deliberately engineered by the government to slow inflation. Government officials have been particularly blunt about their willingness to see housing prices decline somewhat, to make homes affordable to more of the nation's 1.3 billion people.
One question now is whether the government's tight credit policy damaged buyers' confidence in the real estate market and in the overall economy so much that it will be difficult to reverse course effectively. Another question is whether the government now risks a resurgence of inflation by relaxing its banks' lending constraints. It was a flurry of loans in 2009 and 2010, as Beijing sought to buffer China from the post-Lehman Brothers financial crisis, that helped set off inflation.
According to official data, inflation in consumer prices has started to slow, down to 5.5 percent in October from a peak of 6.5 percent in May. But private economists say that the true rate of consumer inflation may be twice as high because of shortcomings in the official data gathering.
By anyone's measure, inflation remains well above the government's goal of 4 percent. But policy makers now appear more worried about maintaining economic growth.
The move the government announced on Wednesday was a reduction in the so-called reserve requirement ratio — something the central bank increased six times this year. The new ratios, as of Monday, will be 0.5 percentage points lower — to 21 percent of total deposits for large banks, and to 19 percent for smaller ones.
The government provided no explanation for its move, releasing only a one-sentence statement: "The People's Bank of China decided to cut financial institutions' renminbi deposit reserve ratio by 0.5 percentage points."
Experts note that monetary policy changes in China are made by the State Council, the country's cabinet, and not by the central bank. Shifts in the broad direction of policy are usually made only with the approval of the Standing Committee of the Politburo of the Chinese Communist Party — the nine officials, all men, who really run China.
Analysts said the decision to announce a change in reserve requirements, rather than quietly nudge state-controlled banks to make more loans, signaled an important political action.
"The public nature of this move — a move that would have gone through the State Council — is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation," wrote Mr. Green, the Standard Chartered economist.
By KEITH BRADSHER
Published: November 30, 2011
http://www.nytimes.com/2011/12/01/business/global/china-reverses-economic-policy.html?hp
HONG KONG — China's central bank, in a surprise move on Wednesday, shifted its economic focus from fighting inflation to stimulating growth by freeing the nation's commercial banks to lend more money.
The bank's move was separate from the subsequent announcement by central bankers in the United States, Europe and Japan that they would pump more dollars into the European banking system. And Western officials said Beijing's move was not done in coordination with theirs.
Still, China's motive was similar: to keep credit flowing through the financial markets.
For more than a year, the Chinese central bank tried to squeeze the country's banking system in hopes of restraining inflation. Its action on Wednesday's indicated that China's government feared the country's growth engine was starting to falter.
Real estate developers, small businesses and other borrowers have complained strenuously in recent weeks of weakening sales and scarce credit. Prices have dropped up to 28 percent for new apartments in some Chinese cities this autumn, and real estate brokers have laid off thousands of agents as transactions slowed. Meanwhile, export orders have slumped, particularly those from Europe.
Beijing's action is a technical one. It allows commercial banks to slightly reduce the percentage of their deposits that they must keep on reserve at the central bank. But the change, which will take effect Monday, means that commercial banks will have more money available to lend, which could help rekindle economic growth and help prevent a disastrous burst of China's real estate bubble.
"This is a big move — it signals China is now in loosening mode," Stephen Green, a China economist at Standard Chartered Bank, wrote in a research note Wednesday.
China's economic growth was the envy of the world until very recently. And even though the country's economy grew in the third quarter at its slowest annual pace in nearly two years, that growth rate was still strong: 9.1 percent in July to September, compared with a year earlier.
But a growing number of Chinese economic indicators are flashing warnings nonetheless. Thousands of Hong Kong-owned factories have closed in southern China this year as Chinese labor costs have risen, the Chinese currency has gradually appreciated against the dollar and export orders have slackened.
On Thursday, the Chinese government plans to release its latest monthly survey of purchasing managers, which will be an important signal on the state of the economy. The survey is tracked as an index, with a reading below 50 suggesting a slowing economy, and it is widely expected to show the index dipping below 50 for the first time in more than two years.
Despite signs of an export slowdown, many economists say China's currency, the renminbi, is still artificially low compared with the dollar. That, they say, is a result of Beijing's long-standing policy of buying dollars in international currency markets to depress the renminbi and keep the nation's exports cheap.
The move that the central bank announced Wednesday would make it more difficult for China to maintain that policy. That is because the central bank, the People's Bank of China, makes its dollar purchases with the money it forces the commercial banks to keep on reserve. By reducing those reserve requirements, the People's Bank will have less money to spend on currency intervention.
But economists said they saw signs in the last month that the People's Bank had less need to limit the renminbi's value, anyway. Speculation in the currency by foreign investors — one factor that could force it higher — has been dissipating as investors find more pressing uses for their money.
Until recently, much of the slowdown in the Chinese economy was deliberately engineered by the government to slow inflation. Government officials have been particularly blunt about their willingness to see housing prices decline somewhat, to make homes affordable to more of the nation's 1.3 billion people.
One question now is whether the government's tight credit policy damaged buyers' confidence in the real estate market and in the overall economy so much that it will be difficult to reverse course effectively. Another question is whether the government now risks a resurgence of inflation by relaxing its banks' lending constraints. It was a flurry of loans in 2009 and 2010, as Beijing sought to buffer China from the post-Lehman Brothers financial crisis, that helped set off inflation.
According to official data, inflation in consumer prices has started to slow, down to 5.5 percent in October from a peak of 6.5 percent in May. But private economists say that the true rate of consumer inflation may be twice as high because of shortcomings in the official data gathering.
By anyone's measure, inflation remains well above the government's goal of 4 percent. But policy makers now appear more worried about maintaining economic growth.
The move the government announced on Wednesday was a reduction in the so-called reserve requirement ratio — something the central bank increased six times this year. The new ratios, as of Monday, will be 0.5 percentage points lower — to 21 percent of total deposits for large banks, and to 19 percent for smaller ones.
The government provided no explanation for its move, releasing only a one-sentence statement: "The People's Bank of China decided to cut financial institutions' renminbi deposit reserve ratio by 0.5 percentage points."
Experts note that monetary policy changes in China are made by the State Council, the country's cabinet, and not by the central bank. Shifts in the broad direction of policy are usually made only with the approval of the Standing Committee of the Politburo of the Chinese Communist Party — the nine officials, all men, who really run China.
Analysts said the decision to announce a change in reserve requirements, rather than quietly nudge state-controlled banks to make more loans, signaled an important political action.
"The public nature of this move — a move that would have gone through the State Council — is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation," wrote Mr. Green, the Standard Chartered economist.
