China to Boost Credit Activity

The reserve ratio of banks reduced by 50 points, more reductions were expected in 2012.

China has lowered the banks reserve requirement, thereby increasing their lending capacity from 350 to 400 billion yuan in an economic downturn.

People’s Bank of China reduced the reserve ratio by 50 basis points, bringing it to 20.5%. The new rule will be effective from next Friday.

This decrease in the amount of reserves, announced late Saturday night, should improve investor confidence in Chinese stock market where people are anxiously waiting for clear signs of easing monetary.

“This is a very positive move for the stock and it will push up the market,” said Li Daxiao, financial analyst at Yingda Securities.

But if lending remains weak and capital flows are irregular, the central bank will have no choice but to further reduce the reserve requirement ratio, analysts said.

The Chinese economy will slow to an annual rate of 8.2% in the first quarter, against 8.9% in the last quarter of 2011, according to recent surveys.

The Problem of Inflation

Chinese Vice President Xi Jinping said in an interview with the Irish Times that the Chinese economy would not register the significant slowdown this year.

Economists estimate that China’s growth should be 8% per year to absorb the annual flow of new entrants to the labor market and those left rural land to find work in the factory.

The central bank announced its first drop in the ratio of bank reserves for three years on November 30, lowering the rate by 50 basis points.

According to a poll conducted in January, economists estimate that the central bank will reduce the reserve ratio by 200 basis points in total in 2012, bringing it down to 19%.

Inflation stood at 4.5% in January, against 4.1% in December after recorded an average rate of 5% in 2011 while the government’s target is 4%.

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