China Reverses Policy to Increase Bank Lending, Federal Reserve Reduces Loan Costs
China announced on Wednesday that it will loosen its monetary policy to spur lending and give the Chinese economy a boost, The New York Times reported. The decision marks a reversal of policy that has seen the country become more stringent with its finances, particularly in the last year.
On Monday, December 5, the People's Bank of China will lower the reserve requirement for commercial banks by half a percentage point, the first such reduction since 2008. The ratio of deposits that banks must retain in the central bank has risen steadily over the past three years, with five increases in 2011 alone.
Following the change Monday, large banks will need to keep 21 percent of all deposits in the People's Bank. Smaller banks have a slightly lower ratio, 19 percent.
The half point shift will free up to 400 billion yuan, or approximately $63 billion, for loans, according to Mark Williams, chief Asia economist for Capital Economics in London. "We see this as a decisive shift in policy stance from China," he wrote in a report. "Further reserve requirement cuts will follow over the next few months. Bank lending will pick up."
The Chinese economy, which has been steadily growing for years, took a hit earlier this month when it was revealed that the country's manufacturing industry dropped to a 32-month low in November. Earlier this year, China's real estate industry faced similar problems, where low availability of loans for buyers resulted in some property values falling as much as 28 percent.
While much of the focus has been placed on improving China's stagnating real estate sector, manufacturing will also see an impact from the adjusted monetary policy. China's prior moves to increase the bank reserve ratio were in response to rising inflation, which caused product costs to increase. However, the European debt crisis has also caused exports to slow. The European Union is collectively the largest importer of Chinese goods, and its credit crisis also affected China's manufacturing slowdown.