In China, banks crank up credit to boost economy

China's central bank is starting to lend more money due to the slow economic growth, Reuters reports.

The People's Bank of China (PBCO) is cutting big banks' reserve requirement ratios (RRR) by 50 basis points (bps) to 20.5 percent starting next Friday. After repeatingly  trying to defy the market expectations in cutting the RRR, the central bank announced its fist cut with 50 bps in three years on November 30, 2012.

A Reuters poll in January showed that economists expected  the central bank to cut the RRR by a total of 200 bps to 19 percent over the course of 2012. Investors expected another cut before the Chinese Lunar New Year in late January, but they estimated wrong as the central bank opted for an open market operation to provide short-term cash for banks.

"It's not a big surprise" Hua Zhongwei, an economist at Huachuang Securities in Beijing, said about the cuts that are happening. He notes that even though Chinese leaders stress policy stability, an RRR cut is necessary because the trade and monetary data pointed to a downward pressure on the economy in January. Given that China adds more each year to the net global growth than any other nation, and Because the economy already is slow due to the European debt trouble and U.S. under-spending, China's slow growth has ramifications for the world economy.

China's economy is likely to slow to an annual growth rate of 8.2 percent in the first quarter from 8.9 percent in the previous quarter, according to the latest Reuters poll. With annual consumer inflation having ticked back up to 4. 5 percent in January from 4.1 percent in December, the PBOC is expected to remain cautious about aggressive monetary easing in the near term.

Shen Lan, an economist at Standard Chartered Bank in Shanghai, said that we will see four more RRR cuts from the PBCO within the year. But one way to predict when these cuts will happen is is too keep an eye on what happens next with the inflation. However, the Policymakers are determined to avoid another speculative bubble to avoid a repetition of the real estate bubble that they have struggled to control for the past two years. Rather than taking big steps to loosen monetary conditions, the PBCO has gradually relaxed some controls on credit at small regional institutions in recent months to support the slowing economy.

This post was originally published on Smartplanet.com