China cuts bank reserve requirement

BEIJING, February 18, 2012 (AFP) - China's central bank said Saturday it would cut commercial banks' reserve requirement ratio by 0.50 percentage points from February 24 to ease restrictions on lending, state media reported.

The reduction by the People's Bank of China in the amount banks must hold in reserve will bring the ratio for most large banks to 20.5 percent, effectively increasing the amount they can lend, Xinhua news agency reported.

The move is a sign the government is continuing to ease restrictions put in place to curb surging inflation and property prices, and follows the central bank's last cut announced on November 30, which took effect on December 5.

"This RRR cut is very good news to the market. It will help release liquidity and allow banks to extend more loans," HSBC economist Ma Xiaoping told Dow Jones Newswires.

Ma estimated the cut would probably release about 400 billion yuan ($64 billion) liquidity.

"The cut reflects that stimulating economic growth is currently the government's priority. January's batch of data like new yuan loans and total social financing figure reflected downside risks to the economy," Ma said.

State-owned lenders issued 738.1 billion yuan in new loans in January, down by 288.2 billion yuan or 28 percent from the same month last year and well short of analyst forecasts for one trillion yuan.

Chinese banks typically ramp up lending at the beginning of the year to avoid losing quotas issued by regulators and the effects of changes in monetary policy.

Analysts said the weaker-than-expected data partly reflected the earlier than usual Lunar New Year holiday in January, and the government's still tight restrictions on credit.

Credit restrictions have fuelled an explosion in underground lending as private firms borrowed money at high interest rates from informal lenders after being rejected by big banks who favour other state-controlled enterprises.

Annual inflation hit a higher-than-expected 4.5 percent in January, the highest level in three months, but analysts said it was distorted as consumers splashed out on food and gifts ahead of the Lunar New Year.

China, anxious about rising living costs, has pulled on a variety of levers to curb price rises over the past two years, including restricting the amount of money banks can lend and hiking interest rates.

Prior to the reserve requirement ratio cut in December, the Chinese central bank had raised it six times in 2011, and raised benchmark lending and deposit rates three times.