By Lars Mucklejohn
Chinese policymakers have made their latest attempt to inject some life into the country’s struggling economy as investors pull money out of its stock market.
In a surprise move this morning, the People’s Bank of China (PBOC) said that the current 7.4 per cent reserve requirement ratio (RRR) will be lowered by 50 basis points early next month to pump more long-term liquidity into the market.
The RRR determines how much commercial banks must retain as cash to offset liquidity risks, meaning those funds cannot be lent out or invested. Lowering the ratio frees up funding for banks to distribute to the economy.
The ratio was lowered twice in 2023, but the size of today’s cut, which was the biggest since December 2021, exceeded analyst expectations.
Officials at the PBOC hope that the move will allow banks to funnel one trillion yuan (£111bn) into the country’s struggling economy.
Markets were also surprised by the way in which the policy was announced. Generally policy changes are announced on the central bank’s website having often been trailed by the government, but this morning’s move was revealed in a public press conference.
The PBOC said on Wednesday that there was room for further easing of monetary policy, suggesting Chinese policymakers are deeply concerned about the state of the economy.
Why stimulus?
China’s post-Covid recovery has been lacklustre, with the country’s top leaders describing the recovery as “tortuous.”
The world’s second-largest economy was already slowing down prior to the Covid-19 pandemic but has struggled to recover from three years of strict lockdowns.
Growth has slowed sharply due to a crisis in the country’s commercial real estate sector and over the past few months the economy has even been battling deflation.
This has hit China’s stock market, which plunged 13 per cent last year and has continued to slide in 2024 amid a massive selloff.
The government is reportedly considering a £218m rescue package to shore up the market. It pledged on Monday to “strengthen the market’s inherent stability”.
However, Hong Kong’s Hang Seng index, where many large Chinese firms are listed, extended gains following the news in its biggest one-day jump in two months.
More to come?
The government has already introduced a range of relatively small stimulus packages, but, these have not fundamentally changed the story. Analysts argued that today’s policy change would also fail to move the dial.
“This is not the panacea that will change the narrative too much,” said Tim Graf, head of EMEA macro strategy at State Street.
“More targeted stimulus would be a more powerful lever to push and they seem to reluctant to do that.”
Mark Williams, chief Asia economist at Capital Economics, argued that the policy was effectively pushing the wrong button.
“In recent times, the binding constraint has been subdued credit demand,” he said. “Relaxing supply constraints has not resulted in stronger credit demand.”
“We don’t expect today’s announcements or the small additional easing we expect in the next few months to do much to sustain the ongoing recovery,” he concluded.
Yun Donglai, an official at China’s human resources ministry, said on Wednesday that “more efforts are needed to stabilise China’s employment”.
Data released last week showed the Chinese economy grew 5.2 per cent in 2023, meeting official targets. Fourth-quarter GDP growth came in at 5.2 per cent, just shy of economists’ expectations.
