May 13, 2012- The central bank of China reduced the amount banks must hold in reserves. This freed up over $63.5 billion that can now be used for lending to stave off a sudden slowdown in the second largest economy in the world.
The cut was for 50 basis points in the reserve require ratio that is effective starting on May 18. This is the bank’s third cut in only six months. Investors called for the cut following data last week that showed a weakening economy that suffered from the slowest growth for a quarter in over three years.
In April, industrial production was down sharply and investment in fixed assets hit the lowest level it has seen in close to 10 years. The data surprised a number of economists who thought the 8.1% annual growth recorded in the first quarter was the bottom of the economic downswing and had expected to see signs the economy was recovering in the latest data.
Many economists felt that the central bank should have acted sooner and cut the reserve ratio following the release of the first quarter numbers. One economist said the recent cut will not impact the economy and the economy could become more vulnerable to weakness on the global level and the slowing of its own economy.
Lending by banks for April was also much lower than forecasted.