Question

Why did China Reduce Reserve Requirements in 2014? How did they expect Consumers and Businesses to Respond?

Answer 1

In 2014, Chinese economy was experiencing a slowdown.

To fight this slowdown and to induce aggregate demand and there by spur growth in the economy, Chinese authorities decide to administer the expansionary monetary policy.

As part of the expansionary monetary policy, China reduces the reserve requirement.

So, China reduced the reserve requirement in 2014 to fight the slowdown in the Chinese economy and to put the economy back on path of growth.

Reduction in reserve requirement will free up additional reserves with the banks for lending purpose.This increase in excess reserves will induce the banks to reduce lending rates to induce consumers and businesses to borrow so that bank can lend these additional excess reserves.

Reduction in interest rates will reduce the cost of borrowing for consumers and businesses and this will prompt them to borrow more for consumption and investment purposes.

Thus,

Consumers and businesses are expected to increase their borrowings for consumption and investment spending.