What could be expected from reduced Chinese banks’ reserve requirements?

Liquidity shortage in China will be reduced by cutting banks’ reserve requirements. Authority’s decision announced in November, 2011 will come into effect on Friday, February 24, Reuters reported on February 20. The same day Bloomberg noticed that the proportion of cash Chinese banks must set aside will drop half a percentage point and more capital will be available for loans. This announcement was made by the central bank on its website on the 18th of February. The amount of additional capital, according to Australia & New Zealand Banking Group’s estimation, may reach 400 billion yuan ($64 billion). Economy stimulation policies define further stakeholders’ actions, so what could be expected?


According to the Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development published by National Bureau of Statistics of China on February 22, 2012 [1], the completed investment in fixed assets (excluding rural households) of the country in 2011 was 30,193.3 billion yuan, up by 23.8 percent over the previous year. Detailed information about fixed assets investment and its growth by sector is available in table 1. [1]

The actually utilized foreign capital increased by 9.7 percent and amounted 116.0 billion US dollars in 2011. The value of direct investment in non-financial sectors and the growth rates in 2011 is provided in table 2.[1] 

The other important aspect is China’s international trade. According to the statistical data imports comprised 1.743,5 billion yuan, exports amounted 1.898,6  billion yuan. The main trade regions and growth rates in 2011 are provided in table 3.[1] 

More information about the main export and import commodities is available in the table 4 and table 5[1] 

 

So, it is likely that the message about the reduced Chinese banks’ reserve requirements will stimulate trade; however, the additionally released capital of 400 billion yuan ($64 billion) comprises only 1.3 percentage of total investment in fixed assets made in 2011. Additionally, according to the above information, China’s trade surplus  amounts 155,1 billion yuan in 2011 and presents 0.5 percentage of total investment in fixed assets. Moreover, isn’t the shortage of liquidity a sign of financial risk?

[1] Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development, National Bureau of Statistics of China, February 22, 2012, http://www.stats.gov.cn/english/newsandcomingevents/t20120222_402786587.htm