China plans to boost lending to support slowing economy - report
China is reportedly planning to cut deposits that banks are required to hold in reserve to counter the effects of a weaker currency.
The Wall Street Journal reports China looks to cutting banks' reserve requirement ratio by a half-percentage point either before the end of the month or early next month. This move would free up 678 billion yuan ($102.6 billion) for lending. The funds may be made available only at banks that lend huge sums to small and private businesses, the ones considered essential in spurring growth.
This is the third time that the country's central bank, the People's Bank of China, has reduced reserve requirements this year.
By flooding the economy with cash, China is basically admitting that its move to devalue its currency earlier this month failed to allay investors' concerns about its economy. In fact, the step backfired as it surprised markets, causing the yuan to fall more than China had expected. A weaker currency could result in more funds leaving the troubled economy.
In the past, a cut in bank reserves has failed to channel funds to the so-called real economy, as many banks favor state-owned firms. And as investors grow more cautious because of a weaker stock market, private enterprises are finding it harder to obtain financing.
China's stock market has been on a downward trend since June. The Shanghai Composite Index plunged 8.5% on Monday, its biggest loss since 2007.
On Friday, global markets tumbled, after a survey showed that manufacturing sentiment in China reached its worst level in six years. US stocks recorded their biggest one-day loss in four years and oil futures reached multi-year lows.
"Views about China's economic prospects appear to be shifting from serious concern to near panic," Eswar Prasad, former China head for the International Monetary Fund, told WSJ.
In the aftermath of the 2008 financial crisis, China drew admiration for its ability to absorb external shocks, but lately it appears that things are changing for the world's second biggest economy. It is now the one causing the shocks.
Despite its troubles, China is still aiming at a 7% growth this year, its slowest since 1990. But senior officials are reportedly divided on how to meet that target. "The government has a much tougher job of maintaining growth now compared to seven years ago," an informed source told WSJ.
That's because traditional tools such as state investments and exports are no longer enough to keep the economy growing. In July, exports fell 8.3% year-on-year, according to WSJ.