China Reverses Tight Money Policy, Sends Stocks Soaring
China signaled a reversal of its tight-money policy Thursday evening by cutting the ratio of funds that its banks are required to keep in reserve by 0.5%. The modest surprise move was enough to send a signal to slumping stock and real estate markets that the central government was shifting from fighting inflation to preserving growth.
The 0.5% cut will lower the reserve requirement ratio on Monday to 21% for large banks and to 19% for smaller banks.
The sudden cut in the reserve requirement ratio comes after the People’s Bank — China’s central bank — increased the ratio six times and raised interest rates three times this year to curbing inflation. Inflation had reached a high of 6.5% in July, causing unrest among the less affluent two-thirds of China’s population. Inflation is now at a still-high 5% range but that concern has apparently been overshadowed by fears that the economic growth may slow too much. Recent estimates had projected a growth rate of 9.3% for 2011 and 8.5 – 9.0% for 2012.
“The public nature of this move – a move that would have gone through the State Council – is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation,” wrote Stephen Green, a China economist at Standard Chartered Bank, in a research note. “This is a big move, it signals China is now in loosening mode.”
The change will encourage commercial banks to lend more freely, and is expected to boost sales in a real estate market that had seen prices of apartments in first-tier cities like Shanghai and Beijing slide by 28% as mortgage financing dried up. The surprise move contributed to a surge in stock prices in Europe and the US and should cause a rebound in China’s stock market when it opens Thursday morning. The Shanghai stock index had plunged 3.3% Wednesday on a remark by a central banker that suggested that the government was unlikely to loosen its monetary policy any time soon. That was the worst one-day loss in four months.
The sudden nature of the decision is evidenced by the fact that Xia Bin, one of the 15 members of the central bank’s monetary policy committee, had just said at a seminar in Beijing on Wednesday morning that China would only “fine tune” its monetary policy and would maintain an overall stance that he characterized as “prudent.”
His remark was interpreted as a sign that China would stick with its tight-money policy and triggered Wednesday’s 3.3% slide in Shanghai stock market. The announcement of the cut came only after the market had closed.
China’s move, combined with the move by six central banks in the US, Europe and Japan to inject more liquidity, caused the Dow to surge by over 3% in Wednesday morning trading.