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China Trims Banks’ Reserve Requirements

China’s central bank is cutting the capital reserve ratio for the country’s banks by 50 basis points, effective May 18th, a further cautious easing of monetary policy in the face of a slowing economy. The biggest banks’ capital ratios will fall to 20%.

Recent economic indicators on trade and industrial output have been weak. Although inflation is falling the bank does not yet think it is stable. Hence the choice of the third cut in the banks’ reserve ratios in six months to continue pumping liquidity into the system. New bank lending in April, at 682 billion yuan, was particularly sluggish, despite spiking the month before. February’s 50 basis points cut added an estimated 400 billion yuan ($63 billion) to the system. So cuts of this scale are modest, and intended to avoid encouraging any return to speculation in property markets. Keeping the planned measured deflation of property prices on track takes interest rate cuts off the table for now.

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