China loosens monetary policy for first time in three years

Today the People’s Bank of China (PBC) has slashed reserve requirements for all banks by 50 basis points from December 5.

The move is the first time the Chinese government has eased its monetary policy in three years.

Its action is designed to ease constraints on bank lending, after the level of excess reserves dropped to worryingly low levels. Analysts suspect Beijing is growing nervous over slowing growth in the country.

According to Capital Economics, this move is a deliberate and public attempt to boost China's economy.

"The PBC could have achieved the same end of loosening constraints on credit growth quietly through its open market operations. The fact that it chose to act in this more public way is a signal not only that policymakers are loosening but that they want to be seen to be doing so," said Mark Williams, chief Asia economist at Capital Economics.

The ratio now stands at a record high at 21.5% for the largest banks, following multiple hikes earlier this year aimed at reining in high inflation that peaked at 6.5% in July.

Inflation has now cooled off to 5.5% in October, with most analysts agreeing it  will fall back further this year, providing room for Beijing to implement loosening measures.

According to Williams, further cuts to reserve requirements will follow over the next few months, boosting bank lending.

However, he warned it will be some time before the changes take effect.

"Today's move and the stronger lending it will encourage will take a while to have an effect. The macro slowdown is likely to continue into Q1 before a rebound occurs," he added.

Charlie Awdry, manager of Henderson's £531m China Opportunities fund siad the government's move to cut reserve requirements for banks should boost substantially boost Chinese equities markets.

"This monetary move is a clear sign that policy is moving from fighting inflation to promoting growth and ought to be perceived positively by investors and Chinese equity markets particularly as the Shanghai market was down over 3% today because of reports that such a move was unlikely," he said.