Traders on the floor of the New York Stock Exchange on Wednesday. Joint action by six major central banks will help China resolve the problem of over-tight liquidity and shore up the economy, analysts said. [Photo /Getty Images]

China still needs to further loosen monetary stance, analysts warn

BEIJING - A joint liquidity injection move agreed by six major central banks will benefit China as it tries to shore up its economy, but will not change the necessity for the country to further loosen monetary stance, said analysts.

"The joint action taken by six major central banks will help China solve the problem of over-tight liquidity and shore up the economy," said Song Hong, senior researcher at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, a major government think tank.

Asian stocks rallied after the central banks moved to ease Europe's debt crisis and support economic growth. The Shanghai stock market rose 2.3 percent after a decline of 3.3 percent on Wednesday.

"The irregular operation indicated that international liquidity is already too tight, and set a signal for China to accelerate the pace of monetary easing, such as cutting the reserve-requirement ratio (RRR) more positively," said Liu Yuanchun, associate dean of the School of Economics at Renmin University of China.

Liu predicted that greater liquidity in the international market will moderate the dramatic capital outflows that China has been experiencing, but will not alter the tendency for capital outflows.

"These measures will definitely not cure the ongoing debt plague in Europe and it is still too early to say how useful they will be in shoring up the global economy."

Song denied that the central banks' move would affect the Chinese authorities' gradual loosening of the nation's monetary stance.

"The Chinese market will not be dramatically affected by the changes in international financial markets, and the Chinese government decision is usually based on the domestic economic situation not monetary conditions overseas," he said.

On Wednesday, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the US Federal Reserve (Fed), and the Swiss National Bank announced coordinated action to increase their capacity to provide liquidity support for the global financial system.

The banks agreed to lower the pricing of the existing temporary US dollar liquidity swap arrangements by 50 basis points applied to all operations, and starting on Dec 5.

"The purpose of these actions is to ease the strains in financial markets and thereby mitigate the effects of those strains on the supply of credit to households and businesses and so help to foster economic activity," said the Fed in a statement.

Authorization of the swap arrangements has been extended to Feb 1, 2013.

In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, the central banks have also agreed to establish temporary bilateral liquidity-swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions warrant it, said the statement.

Two hours before the Fed announcement, China cut the RRR, the amount of cash that the country's commercial lenders must set aside as reserves, by 50 basis points, which is the first reduction since 2008.

Wang Tao, head of China economic research at UBS Securities Co Ltd, said the move is expected to inject more than 350 billion yuan ($55 billion) into the market.

On Thursday, a newly released official purchasing managers' index signaled the first contraction in Chinese manufacturing since February 2009.

The central bank's action casts a cloud over growth for 2012.

Efforts to incubate China and place a floor under the economy implies that the pursuit of better-quality economic growth and reducing the proportionate role of investment could be placed on the back-burner, said Jeremy Stevens, economist at Standard Bank Group of South Africa.

"This would exacerbate credit misallocations that are already ubiquitous across this economy, testing the agility of policymakers throughout 2011."

Stevens said that lending rates should increase because the cost of capital is mispriced.