China’s central bank announced a reduction in the amount of cash banks must hold as reserves on Saturday, capping a week that brought more signs of a slowing Chinese economy. The reserve requirement ratio for banks will drop by 50 basis points beginning next Friday, the second such cut since late November and a move which should ease a recent strain on new credit and loosen tight interbank liquidity. Most importantly, lending capacity could rise by 350-400 billion yuan and boost investor confidence after lackluster January loan numbers exacerbated worries over slower growth in the world’s second largest economy. While the latest RRR cut came as a surprise to some, observers differed on its implications. From The Financial Times:

HSBC’s economists said they expected bigger new loans and at least two additional 50bp reserve ratio cuts in the coming months. “Interest rate cuts will remain a secondary monetary policy tool of choice. We only look for a 25bp interest rate cut when headline CPI falls below 3 per cent, likely towards the middle of the year.”

But some disagree. “Markets should not take this RRR cut as a sign of a bigger monetary easing,” said Ting Lu, China economist at Bank of America Merrill Lynch. “We believe the RRR cut is merely part of the ongoing fine-tuning which was started in October 2011.”

The increased lending capacity should help China’s real estate market, which has seen an extended period of cooling. The policy decision by The People’s Bank of China came the same day that the National Statistics Bureau reported that China’s housing market experienced its worst performance since the government began releasing prices across 70 cities at the beginning of last year. None of the 70 cities surveyed saw an increase in home prices in January, and prices in 48 cities fell from December levels, stats which The China Daily attributed to the tightening measures introduced by Beijing to reel in China’s real estate market in 2011. Some Chinese cities may have already begun tweaking policy to dance around property market restrictions recently handed down from the central government, according to The Wall Street Journal:

Late last month, Zhongshan, an industrial city along the Pearl River Delta in southern China’s Guangdong province, raised the temporary price ceiling on newly built apartments to 6,590 yuan ($1,046) a square meter. The previous cap, set in November, was 5,800 yuan.

The new cap is 11% above last year’s average selling price of 5,935.6 yuan a square meter, so the increase matches the city’s GDP-growth target for 2012, Zhongshan’s housing and land bureaus said in a joint statement. By limiting the increase this way, they say, they are still adhering to directives from central and provincial authorities to maintain property-tightening measures this year and to further stabilize the prices of newly built homes. The rise in the average housing price in Zhongshan last year was about a percentage point below its GDP growth.

Zhongshan’s new cap increase may stand, but elsewhere the Anhui city of Wuhu scrapped a new home buyer subsidy policy almost as quickly as it announced it. Wuhu’s policy ran counter to comments this week by Wen Jiabao that China wouldn’t seek to relax real estate cooling measures, suggesting a disconnect between local officials and Beijing as the country attempts to balance out its housing bubble.

Finally, while the RRR reduction should provide some breathing room for China’s lenders,  one analyst told Bloomberg that interest rate cuts will likely remain a “secondary monetary policy tool” as the government hopes to avoid rising inflation. Consumer prices rose 4.5% in January, reversing a steady decline from last summer’s high, though experts cautioned to take the data with a grain of salt in light of the Lunar New Year holiday.

Spotlight: Europe

A slumping housing market serves as just one of many pressure points on China’s economy, with the European debt crisis also continuing to weigh on this year’s outlook. Despite its growing popularity as a investment destination for private Chinese companies, the eurozone has yet to receive a financial commitment from the Chinese government as it seeks to resolve its sovereign debt woes. And with senior Chinese and EU officials gathering for a summit last week, a People’s Daily editorial reiterated China’s confidence in the European economy but again avoided a firm pledge of financial participation in the bailout:

Europe should also consider China’s participation in solving the European debt crisis in a rational and peaceful way. China does not have the ambition or capacity to “buy out” or “control” Europe like what some European media said, and China always supports the euro and the European Union, which is a sharp contrast to the negative international voices on the prospect of Europe.

When and if China does decide to deploy its massive foreign currency reserves in support of a European rescue package, which many believe would occur through the International Monetary Fund, it has agreed to do so in cooperation with Japan. Japanese Finance Minister Jun Azumi wrapped up a weekend visit to Beijing by saying that he shared China’s view that Europe should do what they can to strengthen their positions amid the crisis, adding that the two sides would approach any potential assistance in close consultation.

The head of China’s sovereign wealth fund, for his part, said last week that the fund remains hesitant to invest in European government bonds.

Chinese Labor: Cheap no More?

In a Friday New York Times Op-Ed, Beijing-based journalist Michelle Dammon Loyalka highlights a fundamental shift taking place in China’s labor market which may threaten the manufacturing dominance that has fueled China’s historic economic rise. While the Lunar New Year often leads to labor shortages as millions of migrant workers head home for the holiday, luring them back to work has proven increasingly difficult:

Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year’s post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.

As Loyalka writes, the structural roots of China’s present labor problems go beyond the typical holiday hangover.

Other News:

• Speaking of China’s currency reserves, estimated at around US$ 3.2 trillion, The Wall Street Journal’s China Real Time Report examines where the cash might be parked.
• Three years since its launch, Reuters examines China’s offshore yuan market and asseses its likely future. Meanwhile, The Wall Street Journal highlights the struggles of the offshore yuan-denominated bond markets as investors have turned to dollar-denominated debt amid concerns over slower-than-expected yuan appreciation.
• With World Bank chief Robert Zoellick announcing mid-week that he would step down in June, a foreign ministry spokesman said China hopes the next leader would be chosen “based on merit and open competition.” The comment reflects growing agitation from the developing world, including the BRIC nations, for a greater voice on the World Bank and IMF. The World Bank expects to choose a successor by the time its April meetings.
• China has raised a mining tax on iron, tin and other resources as it seeks to boost conservation and curb pollution.
• South Korea’s Yonhap News Agency reported last week that China has agreed to invest US$ 3bn to develop North Korea’s northeastern free trade zone.