Do not take China's cut to reserve requirement ratio at face value

Two facts about the central bank's latest easing measure fit fairly neatly. They are the amount of this week's liquidity boost, up to 600 billion yuan (HK$755 billion), and fourth-quarter capital outflow of about 570 billion. Net inflows over the past decade have added to domestic money supply. The sharp reversal helped prompt the central bank to cut banks' reserve requirement ratio by 0.5 percentage points.

Ultimately it is all about jobs and stability. The move reflects mainland leaders' worries about maintaining economic growth needed to meet their job creation target.

The leadership is striving to strike a balance between stimulus that would risk a return to an unsustainable growth rate and the danger of slowdown in the economy developing a momentum of its own. Economists had been expecting further easing following an interest-rate cut in November, to supplement targeted easing measures to lower borrowing costs in selected sectors of the economy. This expectation was heightened by the release this week of the January manufacturing Purchasing Managers Index, which indicated contraction in the sector.

The knee-jerk market reaction to a policy easing to kick off 2015 is to wonder just how badly the mainland economy is doing. But things cannot always be taken at face value at this time because of tightness in the financial system ahead of the Lunar New Year, which generates a huge demand for cash. The cut in the reserve ratio relieves some of that pressure at a time of reduced liquidity. And a lower growth rate in percentage terms can be looked at in terms of an economy three times bigger than a decade ago, which means 7.4 per cent last year is arguably better than the 10.1 per cent chalked up in 2004.

The central bank is also responding to moves by counterparts elsewhere, such as the European Central Bank's massive quantitative easing programme, which adds to pressure on China. Indeed, global economic uncertainty is stoking the pressure, prompting Beijing to allow the yuan to depreciate a little to maintain the competitiveness of exports.

This underlines the urgency of pressing on with structural reforms that rebalance the economy with activities less reliant on credit. It was therefore good to hear an assurance from PBOC research chief Lu Lei that the cut in the bank reserve requirement ratio does not mark a return to strong stimulus or represent a policy shift.