On Wednesday November 30, China’s central bank, the People’s Bank of China (PBC) reversed a June 19 decision to raise the amount of reserve capital it requires Chinese banks to hold. The action represents a major shift from the fiscal tightening China had been deploying to combat rising inflation, and signals a move to monetary easing – a clear sign that China is worried that an economic slowdown is starting to get a grip on the country’s economy.
The action also coincided with a move by six major central banks, namely the US Federal Reserve, the European Central Bank and the Canadian, British, Japanese and Swiss central banks to cut the costs of existing dollar swap lines to just 50 basis points above LIBOR, thus helping to ease what was fast becoming a chronic shortage of dollars in the interbank lending market. The cut will hold till February 2013 and should help ease a developing liquidity crunch in the interbank markets.

The move is said to have been prompted by the Governor of the Bank of England, Sir Mervyn King who made a series of telephone calls to his counterparts. News of the Chinese and the six central bank actions prompted a large bounce in global stock markets, which had been trending rapidly downwards over the last few weeks. China’s rate cut takes effect on 5 December and is expected to free up more than US$60 billion from Chinese bank reserves, which will now be available for lending to Chinese enterprises.

One of the worries for China, however, is that it has been battling a menacing asset bubble in its real estate market, which developed after the government’s massive economic stimulus package in 2008. There has to be concerns that some, at least, of this new lending will find its way into an already overheated property market instead of into industrial projects that could help to drive the Chinese economy forward.

Another worry for China is that not only is the European sovereign debt crisis causing a pull back in Europe’s imports from China, it is also damaging global trade credit, which has huge implications for Asian trade. European high yield fund managers point out that beleaguered European banks, faced with tougher capital reserve requirements under Basel III are reacting by cutting off many of their lending lines, with trade credit being one of the most affected areas.

Full article here: http://www.econmatters.com/2011/12/china-bank-reserves-move-signals-deeper.html