Published: 01 Dec 2011
Last Updated: 06 Nov 2012
It may be the eurozone debt crisis in name, but there’s more and more evidence that the repercussions of troubles on the continent are spreading much further than just Europe. Take, for example, the Chinese manufacturing sector, which has, according to official figures, contracted for the first time in almost three years – thanks to poor orders from troubled eurozone countries. The Chinese purchasing managers’ index fell to 49 in November, down from 50.4 in October (any figure below 50 suggests a contraction). When even the mighty Chinese manufacturers are feeling the strain, there must be a problem…
The Chinese government was clearly anticipating this: just yesterday, it announced a new round of ‘monetary easing’. Basically, it will try to boost lending by allowing banks to hold less capital (21% of reserve as opposed to 21.5%). Such is the size of Chinese banks that even a half-percent drop in capital ratio requirements should inject an additional Rmb 400bn (£40bn) into the banking system. That the Chinese government should resort to this is indicative of just how worried it is: after all, up until very recently, its main aim was to tighten its restrictions on banks to ensure they were safe. How quickly things can change...
Coincidentally enough, China’s wasn’t yesterday’s only central bank to announce liquidity-enhancing measures. Not by a long shot. The US Federal Reserve led a coalition of central banks (including the European Central Bank, Canada, Japan, Switzerland and the UK) in plans to take ‘co-ordinated’ action to ease liquidity. Apparently, the idea is that banks will make it easier and cheaper to take part in ‘dollar swaps’ by cutting the cost of borrowing US currency by half a percent, thus making it easier and cheaper for businesses and consumers to borrow. Or that’s the idea.
Markets reacted favourably to the plans – although the news about Chinese manufacturing put a pretty swift stop to that particular rally. Despite their participation in the Fed’s (un)holy alliance, though, the Japanese don’t seem entirely convinced: ‘The European debt problem can’t be solved by liquidity provisions alone,’ Bank of Japan governor Masaaki Shirakawa pointed out. Which is a fair point – but it should at least get the ball rolling. We’ll have to wait until December 5, when the plans in both China and Europe are put into action, to find out whether it actually works or not, though. Watch this space…
The Chinese government was clearly anticipating this: just yesterday, it announced a new round of ‘monetary easing’. Basically, it will try to boost lending by allowing banks to hold less capital (21% of reserve as opposed to 21.5%). Such is the size of Chinese banks that even a half-percent drop in capital ratio requirements should inject an additional Rmb 400bn (£40bn) into the banking system. That the Chinese government should resort to this is indicative of just how worried it is: after all, up until very recently, its main aim was to tighten its restrictions on banks to ensure they were safe. How quickly things can change...
Coincidentally enough, China’s wasn’t yesterday’s only central bank to announce liquidity-enhancing measures. Not by a long shot. The US Federal Reserve led a coalition of central banks (including the European Central Bank, Canada, Japan, Switzerland and the UK) in plans to take ‘co-ordinated’ action to ease liquidity. Apparently, the idea is that banks will make it easier and cheaper to take part in ‘dollar swaps’ by cutting the cost of borrowing US currency by half a percent, thus making it easier and cheaper for businesses and consumers to borrow. Or that’s the idea.
Markets reacted favourably to the plans – although the news about Chinese manufacturing put a pretty swift stop to that particular rally. Despite their participation in the Fed’s (un)holy alliance, though, the Japanese don’t seem entirely convinced: ‘The European debt problem can’t be solved by liquidity provisions alone,’ Bank of Japan governor Masaaki Shirakawa pointed out. Which is a fair point – but it should at least get the ball rolling. We’ll have to wait until December 5, when the plans in both China and Europe are put into action, to find out whether it actually works or not, though. Watch this space…
