Trimming RRR, Interest Rates Won't Save the Economy

The central bank's decisions to trim banks' reserve-requirement ratios and benchmark interest rates this year have all coincided with bad news, so it was hardly surprising that it would make cuts again on October 23, shortly after the National Bureau of Statistics said the country's GDP growth rate for the third quarter fell to 6.9 percent.

It was a logical decision. Pressure on growth will remain intense for the rest of the year. Nearly 600 billion yuan has disappeared from the market, as banks have sold more foreign exchange than they bought in the last two months. The new cut to the RRR is expected to release about 500 billion yuan to 600 billion yuan into the financial system to help offset the liquidity drain. Meanwhile, the risk of deflation looms large, with the Consumer Price Index hovering at low levels and the Producer Price Index (PPI), which measures wholesale prices of commodities and manufactured goods, fell in September for the 43th straight months.