China, which for more than a year has been pushing its banks to pump out cash to offset the global downturn, abruptly reversed course Tuesday, in the clearest sign yet that Beijing has turned its attention to controlling the repercussions of that credit explosion.The People's Bank of China said it will raise the percentage of deposits that banks must keep in reserve and can't lend, a shift intended to stave off inflation and the asset bubbles that can accompany it.
Economists called the central bank's move a significant, sooner-than-expected step away from the giant stimulus effort that began in late 2008.
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"The reserve requirement often seems to function as a leading indicator, partly because it's a good signaling point to the markets," said Mark Williams, senior China economist at Capital Economics Ltd. in London. "From that perspective, it's a turning point."
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Also on Tuesday, for the second time in a week, the central bank raised the yield it pays on its short-term bills. That makes the debt securities more attractive for banks to buy, a move designed to siphon cash out of the financial system.
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While China's early recovery underpinned the global economy, the country is facing the fallout from its success earlier than other major economies. Recent news that China overtook Germany as the world's largest exporter has sharpened calls for Beijing to lift the value of its currency, a move that would make its exports more expensive. China also faces mounting protectionist pressures.
Meanwhile, Beijing's stimulus policy allowed companies to gorge on easy credit and speculate on properties and stocks -- not necessarily productive investments. Banks could find themselves facing questions about whether loans could become uncollectable.
The easy lending may have also encouraged wasteful spending: The government recently said that over 106,000 officials were punished last year for misconduct, including abuse of economic-stimulus money.
This is a very important development for several reasons.
1.) China has been a primary driver of the recovery. If they are slowing down their lending program it indicates there is concern the negatives of this program now outweigh the positives.
2.) China's growth has provided a floor for economic activity over the last year -- basically, so long as China was still spending money then goods would flow. While the recent moves are not fatal to this idea, they do indicate a slowdown is more and more possible.
3.) Unlike the US which has been growing at a slow rate with excess capacity, China has been growing at a strong clip. That means the possibility of inflation is higher. Hence, the need to be more vigilant now.
