China Lowers Banks’ Reserve Requirements to Support Growth

China Adds Treasuries in March With U.S. Yields at 2012 High
The Chinese flag flies outside the People's Bank of China in Beijing. Photographer: Nelson Ching/Bloomberg

China cut the amount of cash that banks must set aside as reserves for the third time in six months, pumping money into the financial system to support lending after data showed a slowdown in growth is deepening.

Reserve ratios will fall 50 basis points, effective May 18, the People’s Bank of China said on its website yesterday. The level for the nation’s largest lenders will decline to 20 percent based on previous statements.

Premier Wen Jiabao is increasingly shifting to supporting the nation’s expansion from fighting inflation and containing property prices. China’s import gains stalled in April while industrial output rose at the slowest pace since 2009 and new yuan loans were the lowest this year, adding to global growth concerns just as Europe’s debt crisis reignites.

“Growth momentum is still weak and external risk has risen sharply,” Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said by e-mail yesterday. “We think another cut could be in mid-June.”

The slowdown in China, the world’s second-biggest economy, underscores risks to the global recovery as job growth in the U.S. slumps. Central bankers across Europe have started discussing the possibility of a Greek exit from the euro area and how to handle the fallout, Swedish Riksbank Deputy Governor Per Jansson said May 11.

Extra Cash

A 50 basis-point cut in the reserve requirement in February probably added 400 billion yuan ($63.4 billion) to the financial system, according to ANZ estimates. UBS AG put the figure at 350 billion yuan.

“A more assertive monetary policy is needed and the government should step up stimulus efforts even as concerns remain about the real possibility of over-stimulating,” Alistair Thornton, an economist in Beijing at IHS Global Insight, said before the announcement.

Europe’s more than two-year-old debt crisis flared again this month after voters in Greece and France backed candidates opposed to austerity measures. Gross domestic product in the 17-nation region is set to drop 0.3 percent this year, according to the European Commission.

China’s economic performance is facing downward pressure and the domestic and external situations are still “grim,” the Ministry of Industry and Information Technology said April 25. Exports rose by less than estimated in April, a customs bureau report showed on May 10.

Decline in New Loans

Bank of China Ltd., the country’s third-biggest lender by assets, said April 26 that new loans dropped 17 percent to 247 billion yuan in the first quarter from a year earlier. Profit growth decelerated to 10 percent from 10.8 percent in the previous period.

The pace of China’s expansion has moderated for the past five quarters as Europe’s debt crisis crimped exports and government curbs on lending and home purchases damped domestic demand. GDP increased 8.1 percent in the first three months of 2012 from a year earlier, down from an 8.9 percent pace in the fourth quarter.

Bank of America Corp. on May 11 cut its estimate for China’s second-quarter expansion to 7.6 percent from 8.5 percent and reduced its full-year growth forecast to 8 percent from 8.6 percent. Wang Tao, China economist at UBS, also lowered her GDP estimates and cut her export growth projection for this year to 7 percent from 10 percent.

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