Chinese Banks’ Reserve Ratio Lowered as Economy Slows

By Gao Zitan, Epoch Times
December 6, 2011 8:12 am Last Updated: December 8, 2011 11:00 pm

China’s Central Bank lowered the Required Reserve Ratio (The RRR is the portion of investors’ deposits banks must keep on hand as cash.) by 0.5 percentage points on Dec. 5, according to an announcement on its website. Lowering the RRR is expected to make about 370 billion yuan (approximately US$58.1 billion) available for use in the economy

The last time the figure was lowered was in Dec. 2008. Many economists think that the Chinese economy has been negatively influenced by the 12 consecutive increases of the RRR in the past three years, and that now the rate relaxation comes as an effort to stimulate the economy.

Liao Shiming, a Washington D.C. based commentator on the Chinese economy, told the Epoch Times that the timing of Beijing lowering the rates comes as no surprise.

Stimulus Needed

“The Consumer Price Index Beijing published was artificially lowered in order to give an excuse for loosening its currency policy. But, in fact, the main reason is that with too much intervention by the regime, many sectors are facing difficulties. China’s economy has slowed down and Beijing has an urgent need to stimulate the economy,” Liao said.

In November, HSBC China Manufacturing Purchasing Managers’ Index fell to 47.7, the lowest figure in the past 32 months. The index is a measure of manufacturing activity and a number below 50 indicates manufacturing activity is shrinking.

In October, the industrial production increase was 13.2 percent, while the previous months’ figures were around 17 percent.

In the real estate market, prices have been dropping and the number of transactions is decreasing. The China Statistics Bureau announced that real estate transactions in 30 out of 35 cities have decreased, 7 of which have decreased by 50 percent.

Economist Jian Tianlun, Ph.D., told The Epoch Times that the regime has its hidden and public reasons for lowering the rate. The considerable domestic pressures generated by China’s economic policy and the worsening of the international economic environment have both pushed Beijing to lower RRR.

Jian says China’s RRR is too high, “The RRR of large financial institutions has recently reached a record high of 21.5 percent. This has caused over 20 percent of the money to be non- borrowable, leading to increased costs for the banks and decreased availability of loans.”

“The regime wants to keep the low RMB exchange rate, but does not want to increase the interest rate. This has greatly influenced the savings rate; after subtracting the inflation rate, the real interest rate is negative. Therefore, this year, we have seen a decrease in savings,” says Jian.

In October, for example, the savings decreased by 488.7 billion yuan (US$76.8 billion) from September. In July the savings decreased by 450 billion yuan from the value in June. This has decreased the profit of the banks. He sees the decreases in savings as a manifestation of Beijing’s fallacious currency policy which has made a corrective move necessary.

The global economic slowdown, especially in Europe, has directly influenced China’s exports. China’s export increased in August by 24.5 percent, in September by 17.9 percent, and in October by 15.9 percent. Jian thinks the current international environment is another reason China is adjusting its economic policy.

Dilemma

According to Liao, the problems the manufacturing sector faces are decreasing export orders and lack of domestic demand. Even if the manufacturing sector is given loans, these problems will not be solved. The troubled state-owned real estate business, large enterprises and central government owned enterprises are more likely to be the receivers of the funds.

New Tang Dynasty TV commentator, Chen Zhifei agrees that chances are the funds will end up in the hands of state-owned enterprises and real estate loan institutions. But this will stimulate real estate development and bring about a rise in the price of raw materials.

“If we look at it from this angle, the Chinese regime has thought carefully when making this decision. Since inflation only impacts the living of general public, compared to a hard landing of the economy, it thought inflation acceptable. This is the usual approach Beijing has used to move the economic burden onto the general public.” Chen said.

Chen thinks that the Chinese regime is in a dilemma. “If they relax the policies like they are today, the inflation rate will rise. Otherwise, the economy will experience a hard landing. It is indeed a tough problem to solve.”

China’s Central Bank’s reserve is at roughly 20 percent. So the tightening period is not completely at an end. “We will see if this relaxed policy will stay for the long term,” Chen said.

Read the original Chinese article.

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