China Cuts Its RRR for The First Time in Three Months!

While investors were busy focusing on developments in the Greek debt saga, the People’s Bank of China (PBoC) quietly cut its reserve requirement ratio (RRR) by 50 basis points yesterday.

Yep, you read that right! For the second time since November 2011, the PBoC is encouraging China’s banks to lend more by reducing the minimum percentage of reserves that they are required to keep in their coffers.

The PBoC said that starting February 24, the RRR for large commercial banks will fall to 20.5%, while mid-sized and small-sized banks will be following a 17.5% RRR. The decision is expected to bring in 400 billion yuan ($63.54 billion) into the economy as more lending usually means more liquidity.

A 1.0% RRR cut in three months?! Does this mean that the PBoC is indeed expecting a “hard landing” as some market geeks are speculating?

PBoC RRR Cut

Well, not exactly. If you recall, the sharp drop in China’s inflation from 5.5% in October to 4.2% in November 2011, and not economic growth worries, was what prompted the central bank to cut its RRR for the first time in nearly three years last November. At the time the government still had price stability at the top of its concerns.

This time around the government has its sights on economic growth. In fact, one of its first steps is fine-tuning its macroeconomic policies during the first quarter. And with bank lending already reflecting a whopping 29% year-on-year decrease in January, an RRR cut is a good place to start as any!

In addition to boosting bank lending figures, economic activity caused by the RRR cut is also expected help cushion the negative impacts of the euro zone debt crisis and decreasing consumer demand from the U.S. For those who have been living under a rock, the euro zone and the U.S. are two of China’s largest trading partners.

Unfortunately, boosting economic activity might not be so simple for the PBoC. It still has to consider inflation, which has jumped back up from 4.1% in December to 4.5% in January. Right now the PBoC is pointing to the holiday season as the reason for rising prices, but if it’s not careful, the increase in economic activity could pull up prices. Heck, it could even undo some of the government’s price stability efforts last year!

So while some Chinese officials are currently denying expectations of any type of “landing” for the economy, it’s important to note that the central bank is certainly leaning in that direction. Of course, we might have to keep close tabs on the next monetary policy decisions to be sure!