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This is the P.B.O.C. (People's Bank of China) article.

BEIJINGChinas central bank is increasingly finding itself in a bind, balancing its need to continue easing credit to support economic growth against its stated goal of keeping the Chinese currency stable.

Late Monday, the Peoples Bank of China lowered the amount of deposits that banks must hold in reserve by 0.5 percentage point, freeing up an estimated 700 billion yuan ($107 billion) in funds for banks to make loans.

The action portends further volatility in the yuan as market participants try to fathom the central banks intentions regarding the yuan and whether yuan depreciation itself will be used as a tool to support growth, said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.

For the central bank, an increasing liquidity shortage, which poses a threat to overall financial stability, has for now replaced the stability of the yuan as the top concern, according to an official close to the bank. The first sign of a cash squeeze came late last week, when Chinas overnight money-market rates, a key gauge of liquidity, surged and caused Chinese stocks to plunge.

For markets, the move doesnt represent the aggressive easing that many investors desire, said Rob Waldner, chief strategist and head of multisector at Invesco Ltd., which has $741 billion of assets under management. He said the cash crunch in Chinas banking system signals broader stress that isnt likely to be brought to heel by a mere adjustment of their monetary tools.

Global market reaction was muted to Mondays move, which came after stock markets had closed in China. The yuan, already sliding Monday , fell further after the reserve-requirement announcement, hitting its weakest level in about three weeks.

Still, the yuan had been kept largely stable against the dollar since mid-January.

With the exchange rate relatively stable for now, the central bank is shifting its attention to dealing with the downward pressure on the economy, said Zhong Zhengsheng, director of economic research at Hua Chuang Securities, a state-owned brokerage.

The decision to cut banks reserve requirements, effective Tuesday, is the latest surprise turn in Chinas financial policies and comes as demands mount on Chinese authorities to better explain policy moves.

Minutes of a meeting held by the central bank and attended by Chinas senior banking executives in January show that officials avoided a reserve-requirement cut then to avoid downward pressure on the yuan, also known as the renminbi. Such a step would send too strong an easing signal, Zhang Xiaohui, an assistant governor at the central bank, said at the time, adding we need to put a high emphasis on maintaining the renminbis stability when managing liquidity.

Instead, to meet the rising cash needs from banks, the central bank turned to short- and medium-term loan facilities to pump more than one trillion yuan of temporary funding into the banking system.

But that type of funding comes with a high cost for Chinese banks, with interest rates at least 0.6 percentage point to one percentage point higher than the rates on official deposit reserves, estimates Zhou Hao, a senior economist at Commerzbank AG.

The central bank didnt offer a written explanation to accompany its reserve-requirement announcement Monday, unlike its practice as part of major policy actions in the past year.

Meanwhile, investors and analysts question the benefits of further monetary easing. Total financing in the economy grew strongly in January, official data show, but many companies, especially small and private businesses, still complain about difficulties in accessing credit.

At the same time, property prices in Chinas first-tier cities, including Shenzhen, Shanghai and Beijing, have risen sharply in recent months, fueling concerns that easier credit is fanning asset bubbles just as China seeks to eliminate excesses in many sectors.

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You're an adviser to the P.B.O.C. (People's Bank of China) and their goal is to devalue/weaken their currency against other currencies so that China will be able to export more to other countries. Assuming everything else is the same, would you advise them to increase or decrease their interest rate in China?

1. decrease

2. increase

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