China has announced a 50bp cut in the reserve requirement for banks

The People’s Bank of China announced yesterday that they are cutting the reserve requirements for all banks by 50bp, with effect from 5 December 2011. The reserve requirement is currently at a record 21.5% for large banks (see chart attached). This is the first cut in the reserve requirement since 2008.

This announcement represents an important shift in China’s monetary policy. Prior to this, China had embarked on a process of raising the reserve requirement, increasing interest rates and restricting the growth in credit. The authorities have previously expressed concern about the high rate of inflation as well as excess property development.

However, the latest inflation reading reflects a welcome moderation and credit growth has been scaled back. In addition it has become more and more apparent that the Chinese economy is slowing appreciably and that there is a need to boost domestic consumption in the face of slowing export growth. We expect the authorities to continue to relax monetary policy over the coming months.

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