PBOC Cuts Bank Reserve Requirements

(Beijing) -- China's central bank has cut bank reserve requirements for the first time in nearly three years, with many market analysts interpreting the move as a sign of monetary easing after three years of cautious tightening.

On late November 30, the People's Bank of China announced in a statement published on its website that starting from December 5, the reserve requirement ratio for financial institutions will be cut by 50 basis points, the first decline since December 2008. After the adjustment, the reserve requirement ratio for large banks will decline to 21 percent, while for smaller banks it will lower to 17.5 percent.

"The central bank's decision to cut the reserve requirement is likely to be the start of further monetary loosening which will be a future trend," said Shi Lei, analyst at the Ping An Securities. Shi expected further reserve requirement cuts in January, "With Chinese New Year in January, market demand for capital will rise, and the central bank may announce further reserve requirement cuts."

But Shi said that it is still too early to cut interest rates and the central bank is more likely to use the reserve requirement adjustment to send loosening signals to the market.

Amid the worsening European debt crisis, the Chinese economy has also shown a weaker growth momentum. According to HSBC China, the country's November Purchasing Managers' Index (PMI) hit a 32-month low at 47.7 points, a decline from 51 points in October and a reflection of contraction in the manufacturing industry.

On December 1, China's official Federation of Logistics & Purchasing (CFLP) also released its PMI readings which declined 1.4 percentage points to stand at 49 percent in November. The CFLP indices showed that manufacturer's new order numbers witnessed an obvious decline in November.

Zhang Liqun, a researcher with the State Council's Development Research Center, said that the November PMI readings forecast a continuing slowdown of China's economic growth in the future. Exporters are expected to confront less orders as market demand is dropping. But Zhang said that supported by stable domestic investment and consumption, China's economy will not see a sudden decline.

With the easing of inflationary concerns, analysts said that China's policy priority is now shifting from inflationary controls to bolstering economic growth.

Since the fourth quarter, the PBOC and central government ministries have announced a series of policies targeting expanded financing for small- and medium-sized enterprises, raising speculation on monetary loosening.