from www.nytimes.com
As Economy Slows, China Eases Monetary Policy
By KEITH BRADSHER
Published: September 15, 2008
HONG KONG — After five years of tightening monetary policy to fight inflation, China abruptly reversed course on Monday, cutting interest rates and easing bank lending restrictions in response to signs that growth in the Chinese economy was slowing.
YuanChina’s restrictions on large movements of money in and out of the country and its immense reserves of foreign currency have insulated its financial markets from the troubles shaking Wall Street. But this has not been enough to protect China from a global economic downturn.
China’s exports have slowed sharply, particularly when adjusted for inflation and expressed in China’s currency. Real estate prices are weakening, particularly in coastal cities that depend on exports, and China’s stock market has lost three-fifths of its value since October.
Since 2003, China’s top economic priority has been to control inflation. But China’s Politburo, the country’s highest decision-making body, decided at a meeting on July 25 that the top economic goals should shift to sustaining economic development and limiting inflation, in that order.
The People’s Bank of China, the country’s central bank, echoed the Politburo on Monday in announcing the new direction of monetary policy.
The central bank said in a statement that the goal of the policy shift was to “solve prominent problems in the current economic operation, implement the principle of giving different policies for different needs and optimizing the economic structure, and ensure a steady, rapid and sustained development.”
Stock exchanges here were closed Monday for a holiday. The central bank has a history of announcing important monetary policy shifts over weekends or public holidays, often giving advance warning so banks have more time to prepare.
Western economists welcomed Monday’s moves toward lower interest rates and less stringent limits on lending.
“We see these adjustments as a positive step given the unprecedented uncertainties in the international financial markets and rising downside risks in the domestic economy, in particular the real estate sector,” Goldman Sachs said in a research note.
The technical details of Monday’s monetary policy changes were complex.
Effective Tuesday, the People’s Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that commercial banks may charge for one-year loans to business borrowers with strong credit histories. Rates for shorter-term loans will be generally cut even more while rates for longer-term loans will be subject to smaller adjustments, the central bank said, without providing details.
The central bank also lowered by a full percentage point the share of assets that small and medium-size banks must deposit as reserves with the central bank, effective Sept. 25. The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks.
The central bank had rapidly ratcheted up the ratio, from 6 percent in August 2003 to 14.5 percent in December and 17.5 percent in June.
But the People’s Bank of China made a point on Monday of not lowering the reserve requirement ratio on Monday for the country’s six largest banks. These are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications and the Postal Savings Bank of China.
These institutions account for more than two-thirds of the banking market in China. The central bank needs large sums of reserves, for which it pays 1.89 percent interest to the banks, so that it can continue buying large sums of foreign exchange reserves.
By buying tens of billions of dollars worth of foreign currency each month, the Beijing authorities have been able to limit the rise of China’s currency, the yuan, against the dollar. This has preserved much of the competitiveness of Chinese exports, although the weakening of North American and European economies has still hurt demand for Chinese goods.
The People’s Bank of China is in discussions with the finance ministry for an injection of capital, which would strengthen the central bank’s balance sheet and make it easier for the central bank to reduce the reserve requirement ratio.
The central bank also cut this ratio by 2 percentage points for banks in areas damaged by the Sichuan province earthquake on May 12.
As Economy Slows, China Eases Monetary Policy
By KEITH BRADSHER
Published: September 15, 2008
HONG KONG — After five years of tightening monetary policy to fight inflation, China abruptly reversed course on Monday, cutting interest rates and easing bank lending restrictions in response to signs that growth in the Chinese economy was slowing.
YuanChina’s restrictions on large movements of money in and out of the country and its immense reserves of foreign currency have insulated its financial markets from the troubles shaking Wall Street. But this has not been enough to protect China from a global economic downturn.
China’s exports have slowed sharply, particularly when adjusted for inflation and expressed in China’s currency. Real estate prices are weakening, particularly in coastal cities that depend on exports, and China’s stock market has lost three-fifths of its value since October.
Since 2003, China’s top economic priority has been to control inflation. But China’s Politburo, the country’s highest decision-making body, decided at a meeting on July 25 that the top economic goals should shift to sustaining economic development and limiting inflation, in that order.
The People’s Bank of China, the country’s central bank, echoed the Politburo on Monday in announcing the new direction of monetary policy.
The central bank said in a statement that the goal of the policy shift was to “solve prominent problems in the current economic operation, implement the principle of giving different policies for different needs and optimizing the economic structure, and ensure a steady, rapid and sustained development.”
Stock exchanges here were closed Monday for a holiday. The central bank has a history of announcing important monetary policy shifts over weekends or public holidays, often giving advance warning so banks have more time to prepare.
Western economists welcomed Monday’s moves toward lower interest rates and less stringent limits on lending.
“We see these adjustments as a positive step given the unprecedented uncertainties in the international financial markets and rising downside risks in the domestic economy, in particular the real estate sector,” Goldman Sachs said in a research note.
The technical details of Monday’s monetary policy changes were complex.
Effective Tuesday, the People’s Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that commercial banks may charge for one-year loans to business borrowers with strong credit histories. Rates for shorter-term loans will be generally cut even more while rates for longer-term loans will be subject to smaller adjustments, the central bank said, without providing details.
The central bank also lowered by a full percentage point the share of assets that small and medium-size banks must deposit as reserves with the central bank, effective Sept. 25. The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks.
The central bank had rapidly ratcheted up the ratio, from 6 percent in August 2003 to 14.5 percent in December and 17.5 percent in June.
But the People’s Bank of China made a point on Monday of not lowering the reserve requirement ratio on Monday for the country’s six largest banks. These are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications and the Postal Savings Bank of China.
These institutions account for more than two-thirds of the banking market in China. The central bank needs large sums of reserves, for which it pays 1.89 percent interest to the banks, so that it can continue buying large sums of foreign exchange reserves.
By buying tens of billions of dollars worth of foreign currency each month, the Beijing authorities have been able to limit the rise of China’s currency, the yuan, against the dollar. This has preserved much of the competitiveness of Chinese exports, although the weakening of North American and European economies has still hurt demand for Chinese goods.
The People’s Bank of China is in discussions with the finance ministry for an injection of capital, which would strengthen the central bank’s balance sheet and make it easier for the central bank to reduce the reserve requirement ratio.
The central bank also cut this ratio by 2 percentage points for banks in areas damaged by the Sichuan province earthquake on May 12.