China says to cut bank reserves as economy falters

China said on Saturday it would cut reserve requirements for banks, after disappointing economic data raised fears of a sharp slowdown in the world's second largest economy.

The People's Bank of China, the central bank, said it would cut banks' reserve requirements by 0.50 percentage points effective from May 18, according to a statement posted on its website.

The move was widely expected after China on Friday reported industrial production growth slumped to a three-year low in April and other figures also disappointed, adding pressure on Beijing to ease monetary policy.

Beijing has already cut bank reserve requirements twice since December as it seeks to boost lending to spur growth, but economists have called for more policy support as economic figures continue to disappoint.

China's economy grew an annual 8.1 percent in the first quarter of 2012, its slowest pace in nearly three years.

The government is targeting economic growth of just 7.5 percent for the whole year, down from actual growth of 9.2 percent last year and 10.4 percent in 2010.

After the latest move takes effect, China's reserve requirement for most large banks will fall to 20 percent, the official Xinhua news agency said.

Smaller banks will be required to maintain reserves of 16.5 percent.

Analysts said the cut should help pump an additional 400 billion yuan ($63 billion) of liquidity into the economy.

"This is the correct policy action from the central bank's point of view. Basically, this is just to respond to the weak April data," Zhou Hao, China economist for ANZ Global Markets, told AFP.

Some analysts were predicting a move as early as this month, especially after easing inflation gave the government room to loosen monetary policy by cutting reserve requirements.

"Over the short term, especially in the first half of this year, it looks like inflation is under control. So this is good time for them to use monetary policy," Zhou said.

China also said Friday that the consumer price index, the main gauge of inflation, rose 3.4 percent year on year in April, easing from 3.6 percent in March.

But other economic figures dashed expectations that China's economy was heading for a rebound, analysts said.

"Whether foreign trade, investment, tax revenue or credit growth, they all showed the phenomenon of slowing down," said Lian Ping, chief economist at the Bank of Communications.

"The central bank lowering the reserve requirement ratio at this time will strengthen economic vitality," he told state media.

China announced anaemic trade figures on Thursday, which showed a rise of just 0.3 percent in imports for April while exports were up just 4.9 percent.

That highlighted the government's tough task of trying to shift to a more domestic-driven economy as it looks beyond exports, which have been hammered by Europe's debt crisis and stuttering recovery in the United States.

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