China Attempts to Jump-Start Economic Growth

by Jason Jenkins

China Attempts to Jump-Start Economic Growth

by Jason Jenkins, Investment U Research

Thursday, December 8, 2011

China is cutting the amount of money its banking institutions needs to hold on its books against loans in attempt to lend these extra funds and stimulate its economy.

The Chinese government has come to terms with an economy that has seemed to put on the brakes faster than economists had forecasted in October. This week, to the world's surprise, the Chinese central bank reversed its yearlong move toward tighter monetary policy and took the needed action to encourage banks to resume lending.

The Central Bank cut the reserve requirement ratio for financial institutions by half a percentage point. It's the first such cut since 2008 and a total change in direction after rates were raised five times this year. The cut will take effect December 5.

The earlier moves were designed to curb inflation. The inflationary signs are still there, but weak economic growth has replaced inflation as the government's main concern.

Slowing Economy

The great Chinese economy is slowing down. Chinese real estate developers, small businesses and other borrowers have been complaining over the past month of dried up credit and a lack of demand.

The monetary policy moves earlier this year had been aimed at curbing inflation, which persists but appears to have been replaced by weakening economic growth as the top worry for policy makers.

In the real estate market, prices have declined as much as 28 percent for new apartments in some Chinese cities. Real estate brokers have laid off thousands of agents as transactions have shriveled while export orders have slumped.

And to top it all off, Chinese manufacturing numbers have hit a 32-month low, according to a preliminary report for November. The world was aware that the frenetic growth was slowing down.

PBC's Reaction

The People's Bank of China is considerably more secretive than the Federal Reserve or the central banks in Europe because they have always mistrusted outside government attempts to allow for faster appreciation of the Chinese currency.

Their Central Bank has been taking most of the reserves deposited with them and using it to buy dollars in international markets so as to slow the appreciation of the Chinese currency. Easing domestic monetary policy makes it difficult for China to continue limiting the appreciation of its currency against the dollar. We've all heard and seen the commotion this practice has caused in the news between the United States and Chinese governments regarding exports.

Recently, with a lack of international investors speculating in China's currency, the central bank no longer needs to maintain its reserve requirements to continue currency intervention.

"Easing Constraints on Bank Lending"

Intended to increase liquidity, lowering the reserve requirement appeared to cause a boost Wednesday for U.S. pre-markets.

"The move will ease constraints on bank lending," wrote Mark Williams, Chief Asia Economist for Capital Economics in London, in a report for investors. "The level of excess reserves had dropped very low."

Williams said that lowering the reserve requirement by half a percentage point was equivalent to injecting 400 billion yuan, or $63 billion, into the banking industry.

The Chinese government is telling the world that we will do everything in our power to keep our growth going. Look at it as a monetary stimulus package to keep China doing what it has been over the past years.

Good Investing,

Jason Jenkins

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