China slashes bank reserve ratio to fuel growth and markets

China will cut the reserve requirement ratio for banks in early February to unleash more money and help the economy, according to People’s Bank of China Governor Pan Gongsheng.

Pan said during a briefing with the press on Jan 24 that the 0.5 percentage-point cut to the ratio, or the amount of cash banks have to keep in reserve, on Feb 5 will provide RMB1 trillion ($188.4 billion) in long-term liquidity to the market.

It is rare for the central bank governor to pre-empt a reserve requirement ratio (RRR) cut by revealing it in a press conference. Usually, the State Council, China’s cabinet, will hint at the move first, and then the PBOC will follow with an announcement via its website. But his remarks come amid mounting disappointment with the government’s response to ongoing economic concerns. Sentiment is dire, and Chinese and Hong Kong stocks have lost more than US$6 trillion ($8 trillion) in market value since a 2021 peak.

“Announcing an RRR cut in advance suggests no other effective tools available to stem the market rout,” said Shen Meng, managing director at Beijing-based Chanson & Co.

Still, market reaction has been mixed, with analysts seeing the move more to smooth liquidity ahead of the Chinese New Year holiday. Any broader impact on the economy may be limited.

After Pan spoke, the Hang Seng China Enterprises Index extended its gains to 4.7% on Jan 24. China’s 10year government bond yield slipped one basis point to 2.49%, while the yuan changed little in both onshore and overseas trading.

Lowering the RRR allows banks to increase liquidity, enabling them to provide more customer loans and invest in additional bonds to stimulate economic growth. The central bank previously reduced the RRR twice in 2023, with the most recent cut occurring in September.

“An RRR cut helps sentiment in that the action seems more decisive,” said Kevin Net, head of Asian equities at Tocqueville Finance SA. “But some investors may use this as an exit opportunity if there is such short-term market rebound, unless there are more policies to address structural issues than those with the property market.”

Pan said the central bank would have more room this year to support the economy through monetary policy as the Federal Reserve moves away from raising interest rates. He added that Fed policy has shown signs of a pivot recently, and the policy divergence between the world’s two largest economies will narrow in 2024.

“This will expand space for China’s monetary policy operations,” Pan told reporters, adding that the central bank continues to monitor the Fed.