From News, page 2, issue no. 386, Sept 22, 2008
Translated by Ren Yujie
Original article: [Chinese]

There have been signs that the Chinese government would further relax its tight monetary control imposed since last year, and that the financial crisis sweeping the Wall Street is a contributing factor.

Market observers believed the People's Bank of China, the central bank, might introduce more interest rate cuts if the economic performance continued to slowing down.

A day before the US's fourth largest financial institution, Lehman Brothers, filed for bankruptcy protection and triggered panic over its economic fallout, the Chinese central bank had announced rate cut.

Effective from Sept 16, the one-year lending rate was lowered by 27 basic points to 7.2%. The central bank also cut the deposit reserve ratio for all financial intuitions, except the country's six biggest banks, by 100 basic points to 16.5%.

This was the first time the central bank cut benchmark lending rate in four years and reserve requirement in nine years. In contrary, last year alone, the central bank upped interest rate five times and increased 10 times the reserve ratio.

The rate cut had come as a surprise. Though there were expectations for the government to loosen macro controls, even the most optimistic market analysts were initially projecting rate cut to take place only next year.

The rate cuts were believed to be driven by domestic factors. Statistics released in August showed that inflationary pressure in China was easing while the risk for economic decline was rising. Small and medium enterprises (SMEs) were especially hard pressed under tight credit controls.

The financial storm currently hitting the Wall Street could have quickened the pace for loosening policies. China Construction Bank chief economist Hua Ercheng said: "When the Wall Street sinks, it also shakes the market confidence in China."

Wind of Change
This year alone, the key direction of China's macro controls had changed course three times, from "double prevention of inflation and an overheating economy", to "maintaining stable and fast economic growth while controlling prices", and now, finally down to "ensuring economic growth".

Each revision was due to the change in domestic economic climate.

Inflation soared in the third and fourth quarter of 2007 as the country's economic growth hit 11.9% that year. Then, Chinese government was more worried of inflation than economic decline. Therefore, it raised the deposit reserve ratio each month for the purpose of controlling prices. The policy had continued until June 7, 2008.

By late July, the Political Bureau of Communist Party of China's Central Committee decided to pay attention to both inflation and economic growth as scholars and market analysts continued heated debates on whether or not  the Chinese economy had entered a declining phase.

With the latest rate cut, the Chinese government had clearly spelt out its upcoming macro control direction, said JPMorgan and Chase managing director in China, Jing Ulrich. He added: "Inflation is no longer the biggest enemy."

Was that the beginning for a series of lower rates to follow? It appeared that the central bank had some reservation.

It did not lower the deposit reserve ratio for six major state-owned banks - Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Post Savings Bank of China.

Could this be a fallback strategy if the central bank decided to reverse its policy direction?

Market observers believed chances for a reversal would be slim, as the Chinese central bank must now consider possible economic fallout from the US financial crisis. In other words, the driving force for a more relaxed monetary environment now came from both directions - internally and externally.

JPMorgan and Chase projected that China would lower its banks' deposit reserve ratio by another 1% to 2% in the coming months, and loan interest rate would also drop further.