China pumping $81 billion into banks

China is pumping $81 billion or 500 billion yuan into its five largest state-owned banks, joining the European Central Bank in trying to boost its economy, while the US Federal Reserve moves in the opposite direction.

China’s central bank is injecting money into the system via 3-month, low-interest loans to the five banks.

Each of the following banks will receive 100 billion yuan in loans:

  • Industrial & Commercial Bank of China Ltd.,
  • China Construction Bank Corp.,
  • Agricultural Bank of China Ltd.,
  • Bank of China Ltd.,
  • Bank of Communications Co.

The effect of the cash injection is the equivalent of cutting how much commercial banks need to set aside in reserves with the central bank by half a percentage point.

Emerging markets happy

Emerging markets will be pleased at the timely replacement for the Fed’s tapering of its stimulus program.

Asian markets on Wednesday rose after the news became public. However, the Chinese move does not include a much-expected interest rate cut, which is an indication that the Chinese Communist Party is sticking to its targeted measures.

Opinions vary on whether the cash injection will help bolster economic activity. Many say China’s current overall pessimistic economic outlook, which is sapping demand for corporate loans, will persist unless more drastic measures are taken.

Most Asian economists believe today’s measure is nowhere near enough – the People’s Bank of China must adopt a much broader-based stimulus program to prevent a total loss of momentum.

According to Chinese media, there are no specific instructions attached to each loan. However, the banks are expected to aim them at parts of the economy the government wants to bolster, such as small businesses, private businesses and public housing.

The People’s Bank of China is reluctant to reduce interest rates, fearing it may fuel a surge in lending that could exacerbate an already alarming level of debt problems across the country, which could destabilize the economy.

Reducing interest rates might also be seen as an admission of failure, that its policies adopted a few months ago were ineffective.