China loosens bank lending

The Chinese government moved to encourage lending by domestic banks Wednesday, an action which helped boost the value of the Canadian dollar.

It reduced the ratio of cash the banks must hold in relation to loans, in a move to spur borrowing and respond to slowing growth in the world's second-largest economy as Europe's debt crisis and high U.S. unemployment hurt export demand.

Beijing is gradually easing controls imposed to cool an overheated economy and politically dangerous inflation.

Chinese leaders worry economic growth that eased to 9.1 per cent in the quarter ending in September from 9.5 the previous quarter might fall too abruptly, leading to job losses and possible unrest.

China is Canada’s third-largest export market, with trade — mostly in commodities — reaching $11.2 billion in 2009, according to Statistics Canada.

The loonie jumped a full cent immediately after China's announcement.

Loonie up by as much as 1.72 cents US

It was further buoyed by as much as 1.72 cents after central banks, including the Bank of Canada, cut the cost of emergency lending to commercial banks in response to Europe’s debt crisis, and on the heels of a better-than-expected report showing Canada’s economy grew at an annualized pace of 3.5 per cent in the third quarter.

That was the loonie’s biggest intraday jump in a year and a half.

 It gave back some of its gains but still closed up 0.95 of a cent at 98.01 cents US.

The amount of money China's commercial lenders must hold in reserve will be cut by 0.5 per cent of their deposits, effective Dec. 5, the central bank said.

It was the first easing of monetary policy in three years.

"We see this as a decisive shift in policy stance," said Capital Economics analyst Mark Williams. "Bank lending will pick up."

The reserve cut should free up $64 billion Cdn for lending, according to Williams.