China’s reduction in reserve requirements for banks, the first since 2008, may signal government concern that a slowdown in the world’s second-biggest economy is deepening.
Reserve ratios will decline by 50 basis points effective Dec. 5, the central bank said on its website yesterday. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG.
A report due today may show that China’s manufacturing contracted for the first time since February 2009, and the nation’s stocks had their biggest decline in almost four months yesterday. Premier Wen Jiabao aims to sustain the economic expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation sends home sales sliding.
“The deceleration of growth may have become faster than expected on increased external uncertainty, a sagging property market” and difficulties for smaller companies, said Liu Li-gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. who previously worked for the World Bank. The manufacturing report may be “worse than expected,” Liu said.
The Purchasing Managers’ Index may dip to 49.8 for November, a level marking a contraction, according to the median estimate in a Bloomberg News survey of 18 economists. That data is due at 9 a.m. local time today. Consumer price gains eased to 5.5 percent in October, compared with a government target of 4 percent, as exports rose the least in almost two years.
The policy move yesterday came two hours before the U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets.
Spurring lending in China, the nation that contributes most to global growth, may boost confidence as Europe’s crisis worsens. Stocks and the euro rallied after the moves.
China is at “the beginning of monetary easing,” said Qu Hongbin, a Hong Kong-based economist for HSBC Holdings Plc, adding that “aggressive” action is warranted. While more reserve-ratio cuts may follow, interest rates may remain unchanged until inflation is below 3 percent, he said.
The latest change means that reserve requirements for the biggest lenders will fall to 21 percent from a record 21.5 percent, based on past statements.
Mizuho Securities Asia Ltd. said that the timing of the Chinese announcement “could be linked” to the move by the Fed and others. In October 2008, China cut interest rates within minutes of reductions by the Fed and five other central banks as the global financial crisis worsened.
“Some form of coordination may have gone into this,” said Ken Peng, a Beijing-based economist at BNP Paribas SA. “But I think China is pretty urgently in need of a reserve ratio requirement cut anyway -- otherwise, we’d have a liquidity crunch in the New Year.”
Barclays Capital yesterday forecast at least three more reserve ratio cuts by mid-2012 and said two interest-rate reductions are likely next year.
Yesterday’s move may have been partly a response to inflows of foreign-exchange drying up, according to UBS’s Hong Kong-based economist Wang Tao. Central bank data released this month suggested that capital has been flowing out of China.
Growth is slowing across Asia, the region that led the world recovery, with India today reporting its economy expanded the least in two years and Thailand cutting interest rates. In China, the clampdown on property speculation has added to the threat of a deeper slowdown after a 9.1 percent expansion in the third quarter that was the smallest in two years.
Property risks are “overshadowing” the outlook as falling sales threaten to trigger developer collapses, the Organization for Economic Cooperation and Development said this week. Agile Property Holdings Ltd., the developer in which JPMorgan Chase & Co. owns a stake, has said it will stop buying land until at least February and is slowing construction at some projects.
October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities, according to government data. The Shanghai Composite Index fell 3.3 percent yesterday after Xia Bin, an academic adviser to the central bank, said credit should remain “relatively tight” and people shouldn’t hope for a reversal of housing market curbs.
China hasn’t raised interest rates since July, the longest pause since increases began in October last year. Benchmark one-year borrowing costs stand at 6.56 percent. The last interest-rate cut was in December 2008, during the global financial crisis.
Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate.
— With assistance by Yanping Li, Paul Panckhurst, Liza Lin, and Victoria Ruan