China Forgets Inflation and Goes for Growth

China has just pulled off one big U-turn. After months of battling inflation, the government in Beijing has decided its new priority is faltering economic growth. The central bank announced on Nov. 30 it would cut reserve requirements for banks, freeing up 350 billion yuan ($55 billion) to lend in the coming months. “This is a big signal—a very public shift for Beijing,” says Stephen Green, regional head of research for Greater China at Standard Chartered Bank. He predicts four more reserve requirement cuts next year, while both Goldman Sachs and HSBC have said interest rate cuts could follow.

The world has changed a great deal since last July, when Chinese inflation hit a peak of 6.5 percent. The People’s Bank of China, the country’s central bank, had raised benchmark rates four times and reserve requirements seven times over the last 12 months to stifle inflation, which was triggered by rising food prices and ambitious public spending to contain the economic spillover from the U.S. downturn. Since summer’s end, inflation has started to drop, and the euro crisis has pushed Europe—China’s largest overseas market for toys, textiles, machinery, and electronics—closer to outright recession. In October, European orders for Chinese goods fell 22 percent from September, according to China Customs. “The euro zone is looking more perilous by the day, and [the Chinese] know how exposed they are to jolts in global growth,” says Alistair Thornton, a China economist with IHS Global Insight. On Dec. 1, Beijing announced the first contraction since 2009 of its manufacturing sector, which officially makes up about 50 percent of gross domestic product.