China cuts reserve requirement ratio

The People's Central Bank of China announced today that, as of December 5th, the reserve requirement ratio (RRR) for banks operating in the country will be cut by 50 basis points. Hence the RRR will come down from 21.5% to around 20% for most banks, the first cut in nearly three years. The move will ease liquidity after credit tightening over the past year has put pressure on growth amid an export slowdown.

We view this move, obviously orchastrated by the government, as a rebuff to people who thought China would 'bail out' Europe. Here the government sends a strong message saying that it will adopts measures to support its own citizens before it invests in supporting Europe. Real estate accounts for 20% of fixed asset investments, which itself is the driver of GDP growth in China. "Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate. Economic growth cooled to 9.1 percent in the third quarter from a year earlier, the slowest pace in two years", according to Bloomberg news.