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China has clearly decided to join in the global march toward easier money as it attempts to prod its slowing economy forward.

What's not so clear is whether this parade of loose monetary policy will eventually lead the world's economy – or China's – to a better place.

The country's central bank said Wednesday that it was trimming the proportion of deposits that commercial banks have to set aside as a buffer against financial trouble.

Economists say the shift in policy, which reduces required reserves to 19.5 per cent from 20 per cent, will allow commercial banks to lend the equivalent of an extra $100-billion (U.S.) or more. The increased lending should help boost China's decelerating economy. Last year, GDP growth sank to 7.4 per cent, the lowest level in a quarter century, and more recent data suggest the slowdown is deepening.

However, the new minimum for bank reserves also highlights the tremendous and contradictory pressures facing the People's Bank of China (PBOC). The country's falling property prices and persistent deflation in prices at the factory gate would ordinarily provide excellent reasons for the central bank to loosen monetary policy. But the mountain of debt piled up in many sectors pulls in the opposite direction and suggests the need for tighter policy to quell borrowing.

The central bank had resisted calls for many months for broad easing measures, but appears to have concluded that the danger to the growth outlook was serious enough to warrant Wednesday's cut in the so-called required reserve ratio, or RRR. Further cuts in the ratio, as well as at least a couple of chops to the benchmark interest rate, are likely before the year is done, according to analysts at Capital Economics. For its part, Société Générale says investors should brace for another trim to the RRR as well as a reduction to the benchmark deposit rate before summer.

Such a loosening of monetary policy would reinforce what has become a global trend. Other central banks have also been busily indulging in their own versions of monetary easing, ranging from the massive bond-buying program launched last month by the European Central Bank to the Bank of Canada's surprise rate cut. In general, central banks are welcoming the chance to lower the appeal of their currencies and thereby drive down their exchange rates. Everything else being equal, a cheaper currency makes a country's exports more competitive in global markets.

Given all that, some observers interpreted China's move on Wednesday as a tit-for-tat gesture aimed at lowering the value of its currency and maintaining the country's export muscle amid a global currency war. However, "this doesn't add up: The PBOC intervenes directly to set the renminbi exchange rate," Mark Williams of Capital Economics wrote in a note. Furthermore, China's central bank has recently been working in currency markets to achieve precisely the opposite goal – to prevent the renminbi from weakening.

China is shying away from a weaker currency because many Chinese companies have borrowed heavily in U.S. dollars. A cheaper renminbi would drive up the cost of servicing those loans.

Just as worrisome, money is flowing out of the country, as expectations for growth slow. The equivalent of about $118-billion (U.S.) in capital left China in December alone, according to Gwynn Guilford, a blogger at Quartz who previously worked for hedge funds as a China-based analyst. She says the outflow has reduced liquidity, or cash, in the system to dangerously low levels: "Since so many Chinese companies depend on banks rolling over their loans to stay afloat, a sudden disappearance of liquidity risks forcing mass bankruptcy."

The reduction in the reserve ratio should help replace most of the capital that has flowed out of the country. It risks, however, stoking yet another round of borrowing by investors and more frantic buying on the Shanghai Stock Exchange, which soared more than 50 per cent last year.

At least in some eyes, that may not be a bad thing. "One way to stem capital outflows is to broaden the universe of attractive investment opportunities at home for Chinese investors … to 'juice' the equity market," write Pierre Lapointe and Alex Bellefleur of Pavilion Global Markets. But if that is in fact a strategy of Chinese officials, it merely underlines the precariousness of the country's economic situation.

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