What’s the one way to stimulate an economy? Give the big banks more money of course!
Beijing slashes the reserve requirement ratio by 0.5 percent in addition to the reduction in interest rates late last year. This move frees up approximately $100 billion in additional funds banks can lend to borrowers.
In order to avoid another slowdown in the world’s second largest economy, China is betting that by giving financial institutions more money the economy will rev up again. What appears to be a desperate plea for economic reinvigoration, the nation’s banks have been informed they can keep less cash in reserves as part of efforts to lend more money out.
Although this was a hefty sum of money, analysts say smaller banks will have a difficult time lending extra money because of other credit lending standards that have to be met.
“As things stand, alongside further reserve requirement ratio cuts in coming months, we continue also to expect benchmark interest rates to be cut further — perhaps twice more by the middle of this year,” wrote Mark Williams, chief Asia economist at Capital Economics (via CNN Money). “That could change though if today’s move ignites another equity market surge.”
Last year, economic growth slowed to 7.4 percent, the weakest figure in more than two decades.
Various branches within the People’s Bank of China (PBOC) have warned that they won’t relax credit too much and targeted efforts should be part of its arsenal revive the economy instead of broader moves similar to this week’s announcement.
It now remains to be seen if consumers and businesses will actually take advantage of this additional credit and low rates. Judging from the entrepreneurs the Wall Street Journal spoke with, companies aren’t going to be taking out additional loans.
“We don’t have any plan to expand our business and definitely not going to borrow from banks,” said Guo Liyan, owner of Jiangyin Heyuan Textile Co., in an interview with the New York financial newspaper. “Business is not as good as before, though unlike my neighboring companies we are still alive. We’re better off keeping things like they are now.”
Next month, China is slated to announce its official growth target for this year. Many believe the Chinese gross domestic product will grow by less than seven percent amid a decline in real estate and infrastructure spending.
Indeed, artificial credit expansion is just one element of the business cycle. We’ll likely see within the next couple of years greater malinvestment and a bust in some of the bubbles forming all over the Chinese economy.
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