China’s growing problems force a whole economy rethink

The People’s Bank of China (PBOC) is encouraging Chinese banks to lend more to businesses and consumers by cutting the proportion of deposits that they have to hold as reserves by 0.5 percentage points to an average of 8.4% from December 15.

It follows a similar cut in July and is an interesting counterpoint to western central banks such as the Bank of England and Federal Reserve. They are talking about tightening monetary conditions to dampen inflation by raising interest rates and reducing quantitative easing, which effectively creates more money to stimulate lending.

So why are the Chinese loosening and what effect will it have?

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