China Lowers Bank Reserve Requirements as Real Estate Investment Plunges

In the face of increasingly gloomy economic data, China’s central bank announced on Saturday that it would be lowering bank reserve ratio requirements by 0.5 basis points effective May 18th.  The move is aimed at increasing the available credit supply after April data showed a slow down in real estate investment and many other key sectors of the economy.

Real Estate Investment Drops by 45 Percent in China

April’s data from the National Bureau of Statistics showed that the rate of increase in real estate investment during the first four months of 2012 had dropped nearly in half, climbing only 18.7 percent, down from 34.3 percent growth in the first four months of 2011.

Getting more precise about our timeline, real estate investment fell off a cliff in April as the rate of increase for January-March 2012 compared to 2011 had been 23.5 percent, so bringing the average increase over the first four months down to 18.7 percent means that not a lot of cash was going into the property market last month.

Besides real estate, other major indicators such as exports, imports and retail spending all showed lower than expected growth last month. Exports grew 4.9 percent in April — half as much as had been predicted.  Industrial production rose 9.3 percent from a year earlier in April, slowing from a nearly 12 percent increase in March.

Imports basically came to a standstill,  rising just 0.3 percent from April 2011, compared with expectations for an 11 percent increase. Retail sales increased 14.1 percent year-on-year during the month, slower than the 15.1 percent increase forecast by many economists.

China Shifts Focus Away from Inflation

The PBOC’s (People’s Bank of China) most recent cut in bank reserve ratios is the third such move in the past six months. In practical terms this means that big banks will be required to maintain reserves of no less than 20 percent of deposits, instead of the former 20.5 percent. Smaller banks will need to keep cash on hand equal to 16.5 percent of deposits once the new measure is implemented.

The loosening of credit is also a sign that the government has been successful in tackling inflation, which had been its top priority over the last several months. The same batch of data from the National Bureau of Statistics showed inflation had eased to 3.4 percent in April from 3.6 percent the month before.

With inflation under control, central government leaders now seem to have turned their attention to ensuring that they keep the economy moving fast enough to hit the growth target of 7.5 percent for the year. China’s economy grew 8.1 percent in the first quarter, which does not leave much leeway for dramatic drop-offs in expansion as were seen in April.