China pours more liquidity into system

Peter Thal Larsen
The People's Bank of China in Beijing's financial district.
Tomohiro Ohsumi | Bloomberg | Getty Images

China's economic planners have swung into action. Hours after representatives from the Group of 20 leading nations had left Shanghai's weekend summit, the People's Bank of China reduced the amount of cash that lenders have to hold in reserve. That suggests policymakers are more worried about the effects of capital outflows than the recent increase in loans.

The biggest surprise is that the decision to lower the reserve ratio requirement by half a percentage point to 17 percent did not come sooner. The PBOC had previously cut the rate at the end of October. In the subsequent four months, China has suffered hefty capital outflows, shrinking the central bank's foreign exchange reserves to $3.23 trillion at the end of January. Each time the PBOC exchanges dollars for yuan, China's domestic money supply contracts. Thus lowering the reserve ratio helps neutralize the liquidity squeeze at home.