Govt Economist Suggests Cutting Bank Reserve Requirements

In what could be a sign of changing government attitudes towards regulating the country’s property market, a high level Chinese government economist this week recommended cutting bank reserve requirements, as well as other changes in monetary policy in order to help rekindle economic growth.

Speaking at a news conference, Zhu Baoliang, head of the State Information Center’s economic forecasting department suggested that while the People’s Bank of China should continue to prudent management of monetary policy, “a cut in the reserve requirement ratio could be an option.”

In addition to his role with the Information Center, Zhu has also served as an economic analyst with the Ministry of Commerce, as well as commenting on the economy for the official Xinhua News Agency.

A number of economists have warned recently about risks that China’s declining property market have for the country’s economic growth this year.

According to a report in the China Daily, Zhu pointed to the rising long-term bond rate as presenting risks for the country’s economy, as benchmark borrowing costs have risen rapidly in the past year. During the period, the yield on China’s five-year sovereign note rose 83 basis points to 4.02 percent.

Due to the industry’s heavy reliance on credit, real estate developers are much more likely to feel the impact of these rising borrowing costs.

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.

Deciding Whether Declining Growth is Scarier Than Inflation

Now, however, some economists see a rapid slowdown in growth – led by the declining property sector – as a greater risk than inflation.

Last week, Maarten-Jan Bakkum, Senior Emerging Market Strategist at ING Investment Management warned that the country’s real estate issues are hurting China’s competitiveness internationally. “China currently has the weakest growth momentum of all emerging economies,” he said. “In particular sales and price dynamics in the real estate sector continue to be outright negative.”

Given the usual reluctance of Chinese government officials to make any kind of public statement without first receiving all possible approvals from their higher-ups, Zhu’s statement this week could be an indication that some tweaking of monetary policy could be on the way.