China’s stock frenzy has calmed at least momentarily, with the Shanghai and Shenzhen markets roughly even in the two trading days since regulators this weekend made it harder to buy shares with borrowed money and easier to bet against stocks by selling short. The more significant regulatory move, however, was Sunday’s unexpectedly large cut to bank-reserve requirements. With annual GDP growth at 7% at best, China is gambling again on financial stimulus.
By slashing a full percentage point from the amount of cash that banks must park in reserve at the central bank, Beijing released some 1.2 trillion yuan, or $200 billion, of liquidity into the market. That’s twice what it last released, in February, and the most since the global financial panic in 2008.
China’s reserve ratio is often a function of foreign-exchange flows. When capital is flowing into the country, as it was in 2010 and 2011, Beijing can raise the reserve requirement to soak up liquidity and head off inflation. When capital is flowing out, as it is today—to the tune of 231 billion yuan last month, according to the central bank—Beijing can cut the reserve requirement to sustain the monetary base and curb deflation risk.
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