What is the importance of the Chinese government’s announcement to reduce the reserve requirement ratio in order to encourage banks to lend?
The cut in China’s bank reserve ratio by 50 basis points signals that the risks of a major economic slowdown are now of greater concern than an overheated economy. China has been doing well in moving to a “soft landing.” Inflation has fallen steadily and growth has also moderated. But Beijing has been hesitant in moving to more accommodating policies for fear that the underlying forces that could lead to an overheated economy have not been fully addressed.
Two things have changed to accelerate the timetable. The seemingly intractable financial crisis in Europe has convinced the leadership that the consequences could be much worse than envisaged. But politically more alarming, reports of dramatic falls in exports and its impact on firms in Guangdong have raised the prospect of labor unrest.
Two things have changed to accelerate the timetable. The seemingly intractable financial crisis in Europe has convinced the leadership that the consequences could be much worse than envisaged. But politically more alarming, reports of dramatic falls in exports and its impact on firms in Guangdong have raised the prospect of labor unrest.
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Beijing will be hard pressed to deal with something bigger than the crash of 2008. It has not yet fully dealt with the negative repercussions of the last stimulus package implemented largely through the financial system. While that program is credited with preventing a major downturn, it has weakened confidence in the banking sector.
While further monetary relaxation is likely, China has less flexibility in using either interest or exchange rate adjustments to support its objectives. Deposit rates remain strongly negative. Ironically, at a time when the United States is putting pressure on China to let the renminbi appreciate, the concern now is that exports are falling too fast. While market forces might suggest a stable or even depreciating exchange rate, China could feel uncomfortable diplomatically in deviating from its stated intentions for a gradual appreciation.
Beijing may be forced to resort to fiscal policies to deal with downside risks this time around, even though budgetary options are far more cumbersome to work with.
This answer is adapted from an op-ed, China’s new fears of a downturn, published by the Financial Times on December 1.
While further monetary relaxation is likely, China has less flexibility in using either interest or exchange rate adjustments to support its objectives. Deposit rates remain strongly negative. Ironically, at a time when the United States is putting pressure on China to let the renminbi appreciate, the concern now is that exports are falling too fast. While market forces might suggest a stable or even depreciating exchange rate, China could feel uncomfortable diplomatically in deviating from its stated intentions for a gradual appreciation.
Beijing may be forced to resort to fiscal policies to deal with downside risks this time around, even though budgetary options are far more cumbersome to work with.
This answer is adapted from an op-ed, China’s new fears of a downturn, published by the Financial Times on December 1.
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