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China Moves to Spur Lending as Inflation Fears Ease

HONG KONG—China said Friday that it would release more liquidity into the financial system as inflation worries showed signs of ebbing, replaced by concerns that the recovery is slowing more quickly than expected.

On Friday, China’s central bank said it would lower the amount of funds that banks have to set aside, effectively freeing up $154 billion (1 trillion yuan) for banks to lend. The decision by the People’s Bank of China to slash its reserve requirement ratio by 0.5 percentage points, while not a surprise, marks the first such action since April last year, when Beijing made a similar move near the peak of the Covid-19 pandemic’s impact on the economy.

The fresh liquidity signaled by China’s central bank indicates that Beijing may be pivoting toward supporting the economy after a sharp drawdown in credit earlier this year. The pivot to loosening, though limited, puts China on a different wavelength than the Federal Reserve and central banks in other developed economies, which have started to discuss tapering their easing policies amid rising inflation pressures.

Though it didn’t explicitly mandate that banks lend to smaller enterprises, the central bank said Friday that it was loosening the reserve ratio in large part to help China’s smaller businesses, which are widely believed to be hurting more than their larger counterparts—particularly as domestic consumption remains sluggish.

China’s cabinet, the State Council, had signaled the reserve ratio cut on Wednesday, citing the negative impact of rising raw material prices on small businesses, though it stressed that policy makers should avoid “flood-like” stimulus.