Opening the liquidity tap a little ensures further reforms

The timing that the People's Bank of China chose for lifting the credit supply says a lot about Chinese leaders' economic concerns.

On Wednesday, the Chinese central bank announced a 0.5 percentage point cut in the banks' reserve requirement ratio, thus releasing, according to economists, more than 100 billion yuan ($16 billion) of liquidity to the money market.

Lowering the RRR failed to excite the short-term investors, because the economy was surrounded by too many discouraging data.

Most investment houses had forecast that China would make a cut in RRR or in the interest rate in the first quarter of the year. But it is obvious that doing so two weeks before the Lunar New Year, on Feb 19, would produce a larger benefit for the economy than after the holiday, which, in many parts of the country and therefore at many companies, will not effectively end until the second week of March.

If the central government waited until then to make any move to implement what it terms a flexible monetary policy, the policy's effect would be very small, if not negligible, for the whole first quarter.

Obviously it would not be what Premier Li Keqiang wants. At least, he doesn't seem to want the first quarter to go by showing GDP growth lower than 7 percent year-on-year.

During the several symposiums he has held with economists, corporate leaders and other opinion leaders in the run-up to the annual session of the National People's Congress, scheduled to open March 5, he has been quite candid about the fact that the economy is besieged by "many difficulties".

Although an immediate general crush is unlikely, none of the solutions at the moment is perfect, he admitted. Implicitly, a not-so-perfect move will have to be made at times, just to keep the economy from a less desirable situation.

Chinese leaders have made it clear that their priority is reform. And it is to be reform in many ways, as they have promised. But in order to carry out reform, they have to guarantee for the economy a minimum growth rate to avoid letting some of the regular problems, say unemployment or inflation, interfere with the ultra-complicated reform operation.

Some continuing growth momentum is, therefore, economic insurance for reform. As with an individual health insurance policy, that policy will need to be topped up from time to time to keep up its lasting effect.