China has more cuts to go if it's to deal with financial outflows
WHEN China's central bank frees up around US$100 billion of lending power, as it did on Feb 4, it's a statement. Indicators like a weakening yuan, rising foreign-currency debt and capital outflows, suggest it's a defensive one - and not enough.
Banks can now lend out an extra 0.5 percentage point of their deposit base previously locked up in the central bank's vaults. Lenders which service small companies get double that. Simply applying the smaller cut to Chinese lenders' deposit base at the end of December suggests a boost of US$91 billion, a bit less than banks lent in December. In theory, lending begets deposits which beget more lending, so the actual benefit could be multiples of that.
The extra money will do some good. The cost of finance for Chinese companies has been rising: borrowing against IOUs for three months now costs one percentage point more than in November. Rates should now start to come down. Targeting rural lenders and those which serve small businesses makes it less likely new loans will just fuel more overcapacity in bloated industries - or leveraged bets on the stock market. Besides, money usually gets tight before Chinese New Year, just a few weeks away.
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