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Excitement hit the Chinese stock market late in Asia trading on Wednesday after the country’s central bank announced plans to loosen monetary policy in order to support the struggling economy.
The People’s Bank of China Governor Pan Gongsheng revealed at a press briefing that the reserve requirement ratio for banks would be slashed by 0.5 percentage points on February 5th.
Gongsheng stated that cutting the RRR, which dictates how much cash banks must hold in their reserves, is expected to inject 1 trillion yuan ($139 billion) in long-term liquidity into the market.
Loosening bank liquidity, and allowing the financial sector to lend more, has historically been a tool used by PBOC to stimulate growth, and this announcement comes at a time when China’s economy has struggled to fully recover from the COVID lockdowns.
The crash in the heavily-indebted property sector has suppressed consumer sentiment and economic activity. Furthermore, political tensions between Beijing and the West have led to a reduction in foreign direct investment, contributing to the malaise that pushed the Shanghai Composite stock index
CN:SHCOMP
to near a five-year low at the beginning of this week.
Reports on Tuesday suggested that Beijing was considering a $287 billion fund to stabilize the equity markets, which helped benchmark indices recover, with the Shanghai Composite rising by 0.5% and Hong Kong’s Hang Seng index
HK:HSI
bouncing 2.6% from a 14-month low.
The gains continued following Wednesday’s PBOC announcement, with the Shanghai Composite rising by 1.8% and the Hang Seng jumping by 3.6%. The U.S.-traded iShares MSCI China ETF
MCHI,
saw a 2.8% increase in premarket trading.
The PBOC’s policy measures announced on Wednesday highlight the pressure China’s policymakers are under to stimulate the economy, according to Mohamed El-Erian, adviser to Allianz and Gramercy.
However, he added: “This measure is likely to have only a marginal impact on growth prospects. Supplementing it with other — fiscal-based — stimulus measures would do more to boost growth…”
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