China cuts banks’ reserve ratio, signals more tools in pipeline to quell fears
- China’s central bank announced on Wednesday that the reserve requirement ratio for commercial banks will be reduced by 50 basis points from February 5
- The move is expected to inject 1 trillion yuan (US$140 billion) worth of liquidity into the market, but analysts are expecting more support measures
Beijing made substantial moves to quell market panic and revive investor confidence on Wednesday, as fears over a stock market rout and worries about China’s economic prospects continue to rise.
China’s central bank announced it would cut the amount of cash that commercial banks must hold as reserves from February 5.
It also slashed the relending and rediscount rate for bank loans designated for small firms and agricultural businesses by 25 basis points to 1.75 per cent, effective from Thursday.
Analysts, however, are expecting more supportive measures to follow suit.
We’ll create a good monetary and financial environment for the operation of financial markets, including capital markets
The 50-basis-point cut to the reserve requirement ratio (RRR) is expected to inject 1 trillion yuan (US$140 billion) worth of liquidity into the market, central bank governor Pan Gongsheng said at a press conference in Beijing on Wednesday.
“The People’s Bank of China will strengthen the countercyclical and intercyclical adjustment of monetary policy tools, strive to stabilise the market and confidence, and consolidate and enhance the positive economic recovery,” Pan said.
“We’ll create a good monetary and financial environment for the operation of financial markets, including capital markets.”
Pan said China still has ample policy space to work with, with the nation’s average RRR of 7.4 per cent meaning it has more room to manoeuvre compared with developed nations. He added that the RRR would remain an effective tool for medium- and long-term interbank liquidity.
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A policy turnaround by the US Federal Reserve, with the market expecting rate cuts this year, would also free Beijing’s hands, he added.
Dwindling market confidence has led to increased questioning of Beijing’s capability to achieve a solid economic recovery this year. It also threatens President Xi Jinping’s ambition of building China into a financial superpower.
On Wednesday, China’s state-backed newspapers added to calls for financial security and high-quality development.
Finance is the bloodline of the national economy and an important part of the country’s core competitiveness
“Finance is the bloodline of the national economy and an important part of the country’s core competitiveness,” People’s Daily, a mouthpiece of the ruling Communist Party, wrote in a front-page story.
The piece did not mention any rescue packages, but it repeatedly cited Xi’s instruction for providing more financing support for the real economy, technological innovations and financial security.
The state-run Economic Daily also called financial stability the foundation for high-quality economic development.
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“The economy is the body, and finance is the blood. The two coexist and prosper together,” its commentary said on Wednesday.
The China Securities Regulatory Commission said on Tuesday that it would introduce more long-term institutional investors and avoid releasing policies that could dampen market expectations.
Goldman Sachs estimated that global mutual and hedge funds hold about US$1.075 trillion in Chinese equities.
If consumption and the real estate market are weaker than expected after the Lunar New Year, we may see interest rate cuts
That total represents a historically low level of 6.2 per cent of their holdings, down from 10 per cent last year and 15 per cent in 2021, its chief Chinese stock strategy analyst, Liu Jinjin, said in Hong Kong on Tuesday.
Its decision to refrain from cutting policy rates earlier this month, when market sentiment deteriorated, had stirred market speculation about Beijing’s policy intentions.
“The [RRR] move is helpful, but it will take more to restore confidence, which may require fine-tuning the regulatory environment beyond traditional fiscal and monetary stimulus,” said Gary Ng, a senior economist for Asia-Pacific thematic research at Natixis.
“If consumption and the real estate market are weaker than expected after the Lunar New Year, we may see interest rate cuts.”
Ding Shuang, chief Greater China economist at Standard Chartered Bank, said that the measures were aimed more at stabilising confidence in the capital market, but that they would also be beneficial to the real economy.
The central bank could embrace a looser monetary policy, with the option to lower the loan prime rate – a reference for China’s mortgage rate – next month, and subsequently drop the policy rate of its medium-term lending facility, he added.
The Hang Seng Index in Hong Kong extended its rally from 2 to about 4 per cent after Pan announced the RRR cut. It eventually closed up by 3.56 per cent on Wednesday.
The benchmark Shanghai Composite Index, meanwhile, closed up by 1.8 per cent on Wednesday.
Additional reporting by Amanda Lee
