Chinese Banks Ease Lending Restrictions

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The Chinese economy has seen growth slow in the face of faltering global markets. But new lending policies may pump billions back into the economy. The downside—more inflation may follow.

The Chinese regime shifted its economic policy. It could pump billions back into a slowing market. On Wednesday, bank reserve levels were decreased by 0.5 percent—from 21.5 to 21 percent.

Bank reserve levels are the amount of money banks are required to hold in their vaults. A 0.5 percent reduction actually frees up about 400-billion yuan, the equivalent of roughly $63-billion US dollars.

The high reserve levels were originally put into place as a way to cool China's overheated economy. China became one of the world's largest economies in 2009. But with rapid growth came massive inflation, reaching a three-year high of 6.5 percent in July.

But now the growth of China's economy is slowing. With economic woes in Europe, China's largest market for exports has shrunk. The cuts to bank reserve levels potentially pumps billions back into the economy.

Private-sector companies should now have an easier time securing bank loans. Previously high reserve rates made that difficult. Although private-sector companies make up about three quarters of urban employment, loans tended to go to well-connected state-owned enterprises.

Although the cuts to bank reserve levels may be a boost to the economy, it also has the potential risk of again ratcheting up inflation.