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 le…