China, India See Banks As Key To Economic Revival

Leaders of China and India, two of the world's biggest economies, are responding to a decline in their nations' blistering rates of growth by focusing on virtually identical ways to stimulate bank lending and regain financial momentum.

China has been growing at more than 10 percent and India at more than 8 percent, but recent months have seen slowdowns. Both governments have recently responded by lowering their banks' required reserve ratio, which regulates capital holdings, to free up lending.

China's inflation falls

China's inflation rate was 3.2 percent in February, down from 4.5 percent in the previous month and its slowest pace in 20 months, according to the National Bureau of Statistics. It was the lowest level of inflation since July 2010 and below the Bloomberg forecast of 3.4 percent.

A sharp decline in food price growth to 6.2 percent in February from 10.5 percent in January led the slowdown in inflation. Other indicators also disappointed. China's industrial production annual growth fell to 11.4 percent in January and February from 12.8 percent in December, below a Bloomberg analyst forecast of 12.3 percent.

Today's growth data confirms that domestic demand continues to slow down, Sun Junwei and Qu Hongbin, economists for HSBC, wrote in a Friday research note.

Retail sales growth fell to 14.7 percent in January, down from 18.1 percent in December, also below a Bloomberg consensus of 17.6 percent. Chinese home sales were also down 25 percent in January and February.

India's GDP growth slows

On China's southwest border lies India, where GDP grew just 6.1 percent in the fourth quarter of 2011, the slowest level in almost three years.

The manufacturing growth rate was down to 0.4 percent from 2.7 percent in the previous quarter.

India's inflation was also down to a 26-month low in February as food prices dropped and the rupee strengthened.

“GDP growth is likely to dip below 6 percent before lower interest rates and a global recovery lift growth through the second half, wrote Glenn Levine, senior economist with Moody's Analytics, in a February research note.

What's being done

Last month, China's central bank cut the reserve requirement by 0.5 percent, after raising the requirement six times in 2011 to combat inflation. It is expected further to cut its banks' reserve ratio requirement to encourage lending in response to the slowdown.

Beijing has sufficient room and strong reasons to catch up with the region in terms of monetary stimulus, wrote HSBC's Sun and Qu. They expect at least another 1 percent reserve ratio requirement cut in the first half of 2012.

Meanwhile, the India Reserve Bank unexpectedly cut the cash reserve ratio Friday to 4.75 percent from 5.5 percent a week ahead of its scheduled policy meeting, in response to requests from banks and investors.

The overall deficit in the system persists above the comfort level of the Reserve Bank, the bank said in the statement. Accordingly, it has been decided to inject permanent primary liquidity into the system by reducing the central reserve rate so as to ensure smooth flow of credit to productive sectors of the economy.

The bank said it would increase the ability of banks to lend by 480 billion rupees ($9.6 billion). It had previously cut the ratio by 50 basis points on Jan. 24. The decrease will go into effect on Saturday.