China moves to shore up slowing growth

China’s central bank has further cut its reserve requirement ratio to calm investors and stabilize the shaky economy.

He spoke less than two hours before the central bank cut lenders’ reserve requirements, sparking a rally in China’s offshore equity-index futures.

The economic situation has exacerbated over past few months, following the substantial capital outflow, triggered by the currency devaluation.

The People’s Bank of China (PBOC) extended the yuan’s trading hours to 11:30 pm in January to overlap with European hours after the International Monetary Fund (IMF) decided it would admit the yuan into its Special Drawing Rights (SDR) basket by next October, a key step on the way to becoming an international reserve currency.

The easing came just hours after world leaders left a Group of 20 meeting in Shanghai, and just ahead of the annual meeting of China’s parliament, which is trying to engineer a major economic shift towards services and away from heavy industry.

Because of the liquidity concerns, China’s monetary policy will retain the “loosening bias for the foreseeable future”, said Chen Xingdong, chief China economist at BNP Paribas.

The problem is that much of this new credit is simply being used to roll over existing loans, or to pay off old debts – a process that bankers call “evergreening”. The move should free up cash for banks to lend to the wider economy and may be an indication that the country’s authorities are getting less concerned about the flow of capital out of the country, which has been one of the main reasons behind this year’s turmoil in global markets. But this intervention drains yuan funds out of the banking system and causes market liquidity to tighten.

Chinese policy makers were in a dilemma in last few months.

“This shows the PBOC still has room to stimulate markets and the economy, if necessary”, Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd., told Bloomberg News. They declared that the global economy is healthy, but acknowledged they need to do more to boost growth, without announcing any joint plan of action.

A top official in China’s Central Bank has dismissed concerns over the possibility of extended fall in China’s foreign exchange reserves.

The required reserve ratio will drop by 0.5 percentage points effective March 1, the People’s Bank of China said on its website Monday, after Governor Zhou Xiaochuan on Friday highlighted scope for action if needed.

The latest cut to the RRR is the fifth in a year.

He added that the fact that domestic interest rates have remained low and stable through recent weeks of heavy foreign exchange intervention suggested that policymaker’s dilemma was less of a challenge than many believe and that the PBOC was more relaxed about outflows than a few weeks ago.