China to Cut Bank Reserve Requirements to Spur Lending

In the latest sign that China’s government is moving its regulatory foot from brakes to gas, the State Council announced on Friday that bank reserve requirements would be reduced to “an appropriate level.”

According to a story in the Wall Street Journal, the statement from the State Council, which is the equivalent of the country’s cabinet did not specify what level would be appropriate but the expectation is any measures would be targetted at supporting small businesses and rural areas.

China’s government has been loath to stimulate the economy despite the apparent slowdown this year because of fears of further inflating the country’s housing bubble and over-investment in general. However, it has been apparent in recent works that some limited stimulus measures were in the works as the country’s slowing real estate sector threatens to bring the economy as a whole below the 7.5 percent growth targets set for the year.

Regulating Investment Through the Money Supply

By cutting the ratio of reserves to deposits that banks are required to hold, the government would be freeing up more money for lending, and potentially aiding business growth. The stimulus measure was foreshadowed in the middle of last month when a high level Chinese government economist recommended that the central bank make the reduction to support declining growth.

During 2011 when inflation sparked by a surge in credit were the major economic concern for China’s policymakers, the country introduced a series of incremental hikes in the bank reserve requirements to help cool down investment, particularly in the property sector.

More Stimulus on the Way

While the government is clearly being careful not to repeat the 2009 mistake of flooding the market with cheap credit and speculative deals for fear of further aggravating over-investment and creating an even bigger real estate bubble, the reserve requirement reduction is one of a few measures being implemented to rekindle growth.

In response to a slowing real estate market and the resulting drop in economic growth, during mid-May the People’s Bank of China instructed the nation’s banks, most of which can be seen as directly reporting the central authority, to prioritise the granting of mortgages, particularly to first time buyers.

Late last month official media reported that the government would allow cities to ease policy restrictions on home sales depending on market conditions, following reports of heavy discounts on home sales and sliding transaction volumes, particularly in smaller cities and rural areas.