Signal, manoeuvre

5 February 2015 By John Foley Follow @johnsfoley

The central bank has freed up around $100 billion of lending power and could do more if needed. Warning signs like a sharply weakening yuan, rising foreign-currency debts and capital outflows suggest it may have to. China’s policymakers are struggling to keep up.

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China’s central bank cut the portion of deposits that must be kept in reserve by commercial lenders by 0.5 percentage points on Feb. 3, effectively releasing new lending power into the banking system.

The People’s Bank of China announced an extra 0.5 percentage point cut for banks that lend to small and medium-sized enterprises, while Agricultural Development Bank of China, one of the country’s three policy banks, received a 4 percent cut to its required reserve ratio.

Capital and financial outflows hit a decade-high $91.2 billion in the fourth quarter of 2014, according to preliminary estimates of China’s balance of payments released by the State Administration on Foreign Exchange, the currency regulator, on Feb. 3.

China’s currency was trading at 6.25 yuan to the U.S. dollar on Feb. 4, 1.9 percent weaker than the day’s starting point. The yuan is permitted by the central bank to move 2 percent per day in either direction. The yuan has weakened 2.1 percent against the U.S. dollar since Nov. 1.

China’s economy grew at 7.4 percent in 2014, below the government’s official target of 7.5 percent. The official Purchasing Managers Index survey of industrial sentiment for January showed a slide in employment and production.

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