China Resorts to Old Tools for New Economic Problems

I suspect that long-time watchers of China’s reform efforts may not be that enthusiastic about yesterday’s decision by the country’s central bank to cut the required reserve ratios for banks. Although understandable as a short-term response to a more challenging growth environment, it risks being another attempt to crank up an old economic model whose effectiveness has declined and whose unfavorable side effects could increase. If this tactical approach were to sideline deeper reforms, including the critical reorientation of the country’s growth engines, China may find it harder to avoid the middle-income trap that has frustrated the development breakout of several other emerging economies.

This isn’t the first time that the People’s Bank of China has taken such a measure to stimulate lending and promote economic activity. Facing growing economic headwinds, partly because of disruptions from the trade conflict with the U.S., it had previously cut three times this year alone the amount of cash that lenders must hold, complementing the fiscal-stimulus measures implemented by the government. It has also moved to weaken the currency to the lowest level in more than a year.