The People’s Bank of China (PBOC) has announced a significant reduction in the reserve requirements ratio (RRR) for all banks by 50 basis points, scheduled to take effect on February 5, 2024. However, this decisive move aims to bolster the Chinese economy amid a turbulent stock market. This bold step is set to infuse a staggering 1 trillion yuan (approximately US$140 billion) of liquidity into the market, according to a statement by PBOC Governor Pan Gongsheng during a press conference held in Beijing on Wednesday.
Major boost in liquidity
The central bank’s decision to cut the RRR is anticipated to provide a substantial boost in liquidity to the financial system. By lowering the amount of cash that banks are required to hold in reserve, this move enables financial institutions to extend loans to customers and invest in bonds, ultimately supporting economic growth. Pan Gongsheng highlighted the potential long-term benefits of this measure, which comes after two previous RRR cuts in 2023, with the most recent reduction occurring in September.
Following Pan’s announcement, the Hang Seng China Enterprises Index experienced a notable surge, marking its most substantial two-day advance since November 2022. Additionally, the yield on China’s 10-year government bonds briefly dipped before rebounding to 2.51%. The offshore yuan, amidst state-bank sales of the US dollar, managed to recover from earlier losses.
While many economists had been anticipating an RRR cut at some point in the first quarter of 2024, some analysts view this move as a means to ensure liquidity stability in preparation for the upcoming Lunar New Year holiday next month. However, the broader impact of this reduction on the economy remains uncertain.
Mixed reactions from experts
Financial experts have offered mixed opinions on the implications of the central bank’s decision. Kevin Net, the Head of Asian Equities at Tocqueville Finance SA, noted that the RRR cut could boost market sentiment in the short term but cautioned that investors may view it as an exit opportunity unless accompanied by additional policies addressing structural issues.
Shen Meng, the Managing Director at Beijing-based Chanson & Co., expressed concern, suggesting that the advance announcement of an RRR cut might indicate a lack of alternative effective tools to stabilize the market.
The PBOC’s move is part of a broader effort by Chinese authorities to stabilize the economy and financial markets. Premier Li Qiang had called for market stability, prompting various agencies to make promises and announcements to address the situation. These include a focus on improving the quality of listed state-owned enterprises (SOEs) and efforts to maintain the stable operation of capital markets.
Additional policy adjustments
In addition to the RRR cut, Governor Pan Gongsheng also revealed other policy adjustments. Starting January 25, 2024, the central bank will decrease re-lending and re-discount interest rates by 25 basis points specifically for small businesses and the rural sector. Furthermore, the PBOC plans to unveil adjustments to borrowing policies related to commercial property, aimed at expanding funds available to property developers and improving their liquidity conditions.
