Chinese Central Bank Cuts Reserve Requirement to Spur Growth

In an effort to get more cash flowing into the economy, the Chinese central bank eased its requirement for how much cash banks need to hold in reserve. The half percentage point drop is meant to make it easier for Chinese banks to make loans and it should spur growth and spending.

This is the latest move in China’s financial balancing act, where the ruling Chinese Communist Party has sought to maintain a steady growth economy in the face of falling demand for exports, a housing and real estate cool-down, and high inflation.

Even with this slight easing of bank reserve requirements, liquidity remains a major issue for Chinese banks. Steps taken over the past year to mandate higher cash reserves for banks came, as consumer price inflation seemed to be spiraling out of control. Though the BBC reported that inflation in China was down in January—at about 4.5-percent—too much easing of reserve requirements carries the risk of reversing the trend.