China's central bank has cut the reserve requirement ratio for its commercial lenders for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009.
The move comes amid increasing concern among policymakers worldwide that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two year debt crisis. Global markets recovered early losses on the news.
China's central bank said it lowered the reserve ratio by 50 basis points. That reduces the ratio for the biggest banks to 21 percent from a record high 21.5 percent, freeing up funds that could be used for lending to cash-strapped small firms.
"It's a surprising move -- the market was not expecting the central bank to (cut RRR) so fast," said Shi Chenyu, an economist with the investment banking unit of Industrial and Commercial Bank of China.
"The move sends a clear message that the central bank is ready to relax its policy stance."
The central bank, which has already loosened credit curbs to help cash-starved small firms, has pledged to "fine-tune" policy if needed. The new level becomes effective on December 5, the central bank said in a short statement on its website.
Chinese banks have suffered a liquidity crunch in recent weeks after the central bank widened the base for calculating banks' reserve requirements by including their margin deposits.
The 50-basis-point cut in the reserve ratio was the first since December 2008, marking a policy shift after a spate of tightening measures since last year aimed at fighting inflation, which hit a three-year peak in July of 6.5 percent.
However, inflation has since eased to 5.5 per cent in October while economic growth has eased for three straight quarters due to tight credit at home and flagging demand overseas.
The economy grew 9.1 percent in the third quarter from a year earlier, its weakest pace since the second quarter of 2009.
City A.M. Reporter