As the world’s major central banks hurriedly announced measures to ease stresses in global funding markets, China might have felt compelled to move to relax policy that it could otherwise have delayed for a few weeks.
China’s announcement on Wednesday that it was reducing the amount of cash that banks must hold as reserves left no doubt that the world’s second--biggest economy was doing exactly as it did in October 2008: joining a global effort by policymakers to stabilize a rattled financial system.
That somewhat surprise move achieved a lot. For Beijing, it was an opportunity to show how big a part of global policymaking China is and the stake it has in the stability of world markets. It helped that China needed to prop up its own economy.
However, it has also meant that the timetable for China’s hitherto subtle and selective policy easing has been pushed out into the open, and sped up.
“The timing of the cut is earlier than I expected,” independent Shanghai-based economist Andy Xie (謝國忠) said. “The global coordinated action to ease dollar liquidity by six central banks is probably the trigger for China’s move.”
China would have cut the reserve requirement ratio for banks eventually. The economy has slowed, inflation has eased and, most worryingly, capital outflows have accelerated.
A Reuters poll earlier this week had forecast the first cut in China’s bank reserves would come this month and the consensus was for the ratio to be trimmed 200 basis points from the peak 21.5 percent through next year. Wednesday’s 50 basis points cut has altered those expectations quite significantly.
Hong Kong-based Daiwa Capital Markets senior economist Kevin Lai (賴志文) said he now expected a further 200 basis points in reserves cuts over next year, more to prevent the economy from crash landing than to drive another boom.
Economists at HSBC expect 150 basis points of further cuts to be packed into the first half of next year.
To some extent, the policy easing has acquired an urgency because of the worrying pace at which global funding markets are drying up and as banks caught up in the eurozone debt crisis scramble to sell assets and cut their loans.
Money markets are getting as tight as they were in the weeks after Lehman Brothers collapsed in 2008. For China, the risk of more capital outflows could cause further stress in already tight credit markets.
The US Federal Reserve and other central banks, including China’s, cut policy rates simultaneously in October 2008.
This time, it is a synchronized supply of cash. Central banks in Europe, Japan and elsewhere extended agreements with the Fed giving them access to even cheaper US dollars.
China released cash from bank reserves and Brazil cut policy rates.
“It’s clear we are all in it,” Hong Kong-based HSBC economist Frederic Neumann said. “China, as everybody else, has a stake in the stability of the global financial system and China’s contribution is primarily through strong growth domestically.”
However, the concerns over a rare but steady drain of foreign money from the economy appear to have been the primary reason for the cut in the banks’ reserve requirement ratio, the first such move in nearly three years.
Preliminary data suggest capital flowed out of China in October for the first time since 2008. China had to cut bank reserves if it wanted to keep money supply stable, given that bank deposits were falling and the trade surplus was shrinking.