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The People's Bank cuts bank reserve ratios again but why is China moving so slowly to stimulate its economy?
05/14/2012 11:08 am EST
The assumption is that the more China’s economy indicates that it is slowing, the more steps Beijing will take to stimulate the economy. The action this weekend indicates that’s still a reasonable assumption.
In data released Friday the government reported that industrial output grew at an annual rate of just 9.3%. That was the slowest growth rate since April 2009. New bank lending for April, at $108 billion, came in almost 13% below projections and 30% below March levels. Money supply growth, measured by M2, was just 12.8% when economists were looking for 13.3%.
In response to this data—and to the growth rate of China’s economy slipping to 8.1% in the first quarter of 2012 (the fifth consecutive drop in growth)--the People’s Bank cut bank reserve requirements this weekend by another 0.5 percentage points to 20%, effective May 18. It was the third reduction in reserve requirements in six months but the first since the People’s Bank moved in February. A reduction in the reserve ratio of this dimension frees up about $65 billion on bank balance sheets for lending.
But the pace of government moves to stimulate the economy is slower than most, myself included, had expected. After moving aggressively in February, the People’s Bank had been quiet until this weekend’s action. That’s March and April on the sidelines as the economy continued to slow.
One increasingly popular explanation is that the hesitancy on economic policy has been a result of continued turmoil among China’s leadership after the ouster of Chongqing party chief Bo Xilai. That power struggle seems to have claimed another casualty with the sidelining of Zhou Yongkang, China’s chief of domestic security and a Bo supporter on the nine-man standing committee of the Politburo that essentially runs China.
The theory is that without clear direction from the top China’s traditionally cautious bureaucrats are reluctant to take any initiative. And that may be why the People’s Bank, a relatively independent body, has been the first to add more stimulus to the economy.
Whatever the reason a number of banks and economists have moved their estimates for when growth in China’s economy will bottom from the second quarter of 2012 to the third quarter.
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