China Lowers Reserve Ratio as Hard Landing Fears Arise

China's central bank eases the money supplyChina’s central bank on Saturday lowered the amount of cash that banks will be required to keep in reserve in a move that signals the government’s concern over a potential hard landing after economic data for January fell short of expectations.

The move by the People’s Bank of China (PBOC) is estimated to provide an additional RMB 350-400 billion to the nation’s money supply after China suffered its fourth consecutive quarter of declining economic growth.

After moving to cool inflation and rein in a runaway real estate market during 2010 and 2011, the PBOC is now moving towards easing economic restrictions to avoid a hard landing while it continues to battle inflation.

The 50 basis point cut in the reserve requirement ratio (RRR) will take effect on Friday, February 24th and puts the current RRR at 20.5 percent. The RRR cut follows a similar move in November of 2011 and had been expected by some analysts as early as December last year.

Following the move, Jin Qi, an assistant governor with the PBOC, clarified the rationale for the ratio cut by noting, China’s

“Economic downward pressures coexist with price rise pressures,” Ms Qi said.

Among the gloomy economic data for January were a 0.5 percent annual decline in exports, and a contraction of money supply growth to 12.4 percent compared to 13.6 percent in December.

The severity of the January data was pointed out in an analyst’s statement reported by Reuters,

“The growth implications of the below-normal lending in January are dire, should that lending pace be continued,” said Paul Markowski, President of New York-based MES Advisers, a long-time investment adviser to China’s monetary authorities, who calculates lending was on a 7.9 percent growth path.

“The implication of that is sub-7 percent GDP growth for the year — a real recession,” he said.

Many economists, including key advisors to China’s central government, believe that GDP growth of less than eight percent in China could put the economy in crisis and raise the spectre of social instability.

While few analysts expect the government to reduce interest rates this year, further cuts in the reserve ratio could be coming, depending on what happens with regard to inflation.


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