China cuts bank reserve with export outlook ‘grim’

China cut the amount of cash that banks must set aside as reserves for the second time in three months to spur lending as Europe’s debt crisis and a cooling property market threaten economic growth.
Reserve requirements will fall by 50 basis points effective Friday the People’s Bank of China said on its website yesterday. Before this move, the ratio for the nation’s largest lenders stood at 21 percent.
Premier Wen Jiabao aims to steer the world’s second-biggest economy through a property market slowdown and the weakest export growth since 2009, with the commerce ministry last week calling the trade outlook “grim.” The International Monetary Fund said this month that China’s expansion might be cut almost in half if Europe’s debt crisis worsens.
“Growth remains the top concern for policy makers,” Zhu Haibin, a Hong Kong-based economist for JPMorgan Chase & Co., told Bloomberg before yesterday’s release. “Monetary policy will be biased toward easing this year.”
A 50 basis-point cut in reserve ratios adds RMB 400 billion to the financial system, Australia & New Zealand Banking Group Ltd. estimates. The previous reduction, which took effect in December, was the first since the global financial crisis.

Differentiated Reserve Ratio

The central bank said last Wednesday that it will improve the use of differentiated reserve ratios, where individual lenders hold different percentages of deposits as reserves according to their capital adequacy levels and lending growth.
The bank also said that M2, the broadest measure of money supply, will probably grow 14 percent this year, a target that JPMorgan Chase’s Haibin said would imply three to four cuts in reserve ratios this year.
China’s exports and imports fell for the first time in two years last month and new lending was the lowest for January in five years.
Inflation unexpectedly rebounded to 4.5 percent in January, accelerating for the first time in six months, as a week-long Chinese New Year holiday boosted spending and prices.

China’s Expansion

Ken Peng, a Beijing-based economist at BNP Paribas SA, said the government needs to be “careful not to overshoot monetary loosening, as it did in the financial crisis.” Lingering effects of record lending in 2009 and 2010 include the risk for banks that local government financing vehicles will default, saddling lenders with bad loans.
China’s economy grew 8.9 percent in the fourth quarter from a year earlier, the slowest pace since the first half of 2009. Home prices have declined in cities from Beijing to Wenzhou as the government cracks down on speculation and implements a program to build low-cost housing. Wen has said China won’t waver on its real-estate curbs, which aim to bring home prices to a “reasonable level”.
Jim O’Neill, the economist who coined the term BRIC for developing nations Brazil, Russia, India and China, said last month that Chinese officials had moved to avoid the “wild housing bubbles” that many Western nations had experienced. O’Neill, chairman of Goldman Sachs Asset Management, said he doesn’t see a “hard landing” for China.
Besides yesterday’s move, the central bank is allowing the nation’s five biggest lenders, including Industrial & Commercial Bank of China, to increase first-quarter lending by a maximum of about 5 percent from a year earlier, two people at state lenders said previously.
Separately, the banking regulator has been weighing a plan to relax capital requirements, four people with knowledge of the matter said in January.