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Economics - Essay Example

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That response arrived on Saturday in the form of a cut in the reserve-requirement ratio, releasing more funds for the banks to lend.
The 0.5-percentage-point…
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Download file to see previous pages... That makes lending conditions more difficult, especially at smaller banks. The March loan-to-deposit ratio of 83 per cent for Chinas small and midsize banks was already above the 75 per cent limit set by the regulator.
In aggregate, though, it isnt clear the banks are short of funds to lend. The level of reserves banks hold above the requirement held steady at 2.2 percentage points in March, up from 0.8 points in the middle of 2011. The seven-day interbank lending rate was 3.2 per cent Friday, down from an average of 4 per cent in 2011. Both measures suggest that liquidity conditions are improving.
With no shortage of funds in the banking system, but new loans low, the obvious conclusion is that it is constrained demand for loans, not a constrained supply of credit, that is the problem. The shrinking share of long-term loans in the total for new lending - down to 28 per cent in April from an average of 51 per cent in 2011 - suggests businesses dont see so many opportunities for profitable investment.
In the past, demand for loans was always strong. Increasing supply by lowering the reserve-requirement ratio was a sure-fire way to give growth a boost. If demand is now less assured, opening the lending taps may no longer provide a quick ...Download file to see next pagesRead More
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