BEIJING – China’s central bank announced Saturday a reduction in the amount of reserves that banks must hold in an effort to spur lending and revive a sharply flagging economy.
The 0.5 percentage point cut in the banks’ required reserve by the People’s Bank of China starting May 18 frees up billions of dollars for lending. It follows the release of statistics in the past week that showed the economy slowing more rapidly than economists – and perhaps the government – expected.
A slowdown in China, the world’s second-largest economy, threatens to ripple across the globe, which is already struggling to ward off continued economic weakness in Europe. China has been an engine of global growth in recent years, and its robust purchases of iron ore, raw materials and industrial components have buoyed economies from Australia and Brazil to Japan and Zambia.
While the government has been eager to steer growth from the torrid rates of the past decade to a more sustainable pace, a sharp slowdown would risk higher unemployment and lower revenues for already cash-strapped local governments.
The slowdown also comes as most of the current leadership prepares to step aside for younger leaders. A once-a-decade event, the transition always sees the Communist Party on alert for signs of unrest that could challenge its authority. This year’s transition has been made bumpier by the unexpected purge of a powerful politician, raising speculation that leaders are too consumed with infighting to pay attention to the economy.
A slew of economic data in recent days pointed to an economic deceleration. Lower growth in industrial production in April – 9.3 percent from a year earlier but down 2.6 percentage points from March – raised alarm bells as did electricity production which barely budged in April and which economists take as a proxy gauge of activity in a country where government statistics are not always considered accurate.
The rate cut announced Saturday is the third for the required reserve ratio since November, when the government reversed a nearly two-year effort to rein in stubbornly high inflation. It effectively brings the ratio down to 20 percent for major banks and 16.5 percent for small- and medium-sized institutions.