China reduces bank reserve levels to release money for lending, encourage growth amid slowing export demand as result of Europe's debt crisis, high U.S. joblessness

Cindy Allen

BEIJING , November 30, 2011 (Associated Press) – China reduced bank reserve levels Wednesday to release money for lending and help shore up slowing growth in the world's second-largest economy as Europe's debt crisis and high U.S. unemployment hurt export demand.

Beijing is gradually easing controls imposed to cool an overheated economy and politically dangerous inflation. Chinese leaders worry economic growth that eased to 9.1 percent in the quarter ending in September from 9.5 the previous quarter might fall too abruptly, leading to job losses and possible unrest.

The amount of money China's commercial lenders must hold in reserve will be cut by 0.5 percent of their deposits, effective Dec. 5, the central bank said. It was the first easing of monetary policy in three years.

"We see this as a decisive shift in policy stance," said Capital Economics analyst Mark Williams. "Bank lending will pick up."

Analysts have expected Beijing to loosen lending controls after inflation eased to 5.5 percent in October from a three-year high and a surge in housing prices leveled off.

Battered by weak demand in Europe, China's biggest foreign market, export growth declined to 15.9 percent in October, the lowest level this year following a steady decline from March's high of 36 percent.

October exports to Italy tumbled 17 percent from a year earlier, while the growth rate for exports to Germany, France and Britain fell to single digits.

The communist government repeatedly hiked interest rates and tightened lending curbs to cool economic growth that soared to 10.3 percent last year.

Wednesday's reserve cut should free up 400 billion yuan ($63 billion) for lending, according to Williams.

That could help struggling entrepreneurs and small companies that have been squeezed by a clampdown on lending that pushed many into bankruptcy and wiped out thousands of jobs.

But Chinese authorities also will need to prevent the newly eased credit from igniting a binge in real estate and stock market speculation. They lack the tools used by other major economies to fine-tune lending.

Analysts blamed the spike in consumer prices over the past two years in part on a bank lending boom they said was allowed to run too long after it helped China rebound quickly from the 2008 global crisis. Authorities said billions of dollars of stimulus money was diverted into speculation.

"Authorities will be grappling with the fine details of economic policy, treading a fine line between a hard landing and another credit boom," said IHS Global Insight in a report last week.

Beijing began its round of loosening lending controls last week by cutting reserve requirements for rural credit cooperatives.

The government also has adjusted tax rates in recent weeks to give small companies and transportation and service companies a boost.

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