China Central Bank Cuts Banks’ Reserves

China’s central bank cut the amount of cash that banks must hold as reserves on Saturday, pumping out more funds that could be used for lending to head off sharper slowdown in the world’s second-largest economy.
The People’s Bank of China delivered a 50-basis-point cut in banks’ reserve requirement ratio (RRR), effective from May 18.

The latest RRR cut – the third in six months — came a day after a flurry of data showed that the world’s second-largest economy was slowing faster than expected, with industrial production weakening sharply in April and investment slowing to its lowest level in nearly a decade.

Meanwhile China’s annual inflation rate for April moderated to 3.4 percent in April from 3.6 percent in March.
The cut in bank reserves also comes as bank lending in April came in at a disappointing 681.8 billion yuan ($108.04 billion), lower than the 800 billion forecast, which raised doubts on whether Beijing has money supply settings sufficiently loose to keep the economy on an even keel.

The cut of RRR to 20.0 percent from 20.5 percent for big banks releases an estimated 400 billion yuan ($63.5 billion) that could be used for bank lending. Analysts reckon another 800 billion yuan’s worth of cuts has been earmarked for the rest of the year.

The central bank announced its first cut in RRR in three years on Nov. 30 last year. That move took the rate down from a record 21.5 percent. The second cut in this easing cycle was delivered in February.
Lowering RRR for banks helps China offset sluggish capital inflows that have been hit by skittish investors wary of investing their funds in higher-risk emerging markets at a time of global economic uncertainty driven mainly by Europe’s festering debt crisis.

Crucially, an RRR cut would help Beijing meet its target of growing money supply by 14 percent in 2012.
China’s bank lending trumped forecasts to spike to 1.01 trillion yuan ($160 billion) in March, a sign of fresh traction in Beijing’s bid to boost credit creation to support the cooling economy.
The surge in lending was the biggest monthly extension of credit since January 2011, when new loans last topped 1 trillion yuan, holding out hope that China’s economy will not only avoid a hard landing but pick up speed again later this year.

But economists said the data, which also showed stronger-than-expected growth in money supply, reinforced bets that an interest rate cut is unlikely since Beijing can ease monetary policy by just loosening credit controls.
Chinese leaders remain wary about inflation risks given rising global commodity prices and determined to cool down the property sector to ward off a speculative bubble.
The deep-pocketed government has also cut taxes for small firms, which are vital for generating economic growth and jobs, to help them cope with a credit squeeze and weaker exports, Reuters reported.