BEIJING, CHINA – NOVEMBER 08: Pan Gongsheng, governor of the People's Bank of China and head of the State Administration of Foreign Exchange, speaks during the 2023 Financial Street Forum Annual Conference on November 8, 2023 in Beijing, China. (Photo by VCG/VCG via Getty Images)
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The 50 basis point cut in the reserve requirement ratio (RRR) will release 1 trillion yuan ($139.8 billion) of long-term capital, the central bank said.
“The newest [PBOC] “Announcements can be interpreted as the beginning of a policy reversal from previous reactive and selective measures by investors, and they will continue to look for further signs and measures of policy support,” said Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank said in a note on Thursday.
Beijing has been reluctant to provide massive stimulus, which would also widen the yield gap between China and the U.S. given the Federal Reserve's tighter monetary policy. The PBOC again left the key interest rate unchanged on Monday and maintained the key lending rates.
The magnitude of the central bank's reserve ratio cut announcement on Wednesday exceeded Nomura's forecast of a 25 basis point cut, said the firm's chief China economist Ting Lu.
“We believe that this higher-than-expected RRR cut is another sign that the PBoC and senior policymakers are increasingly concerned about the ongoing economic downturn that we have been signaling since mid-October last year and the recent developments in the stock market.” he said in a note on Thursday.
“What's more interesting is that the policy decision was announced in an unusual way, as the PBoC governor made the announcement personally during a question-and-answer session at the press conference,” Lu said.
Pan told reporters on Wednesday that the central bank and the National Financial Regulatory Administration would soon release measures to encourage banks to lend to qualified developers. The document was released later in the day.
“It is a significant step by regulators to improve credit support for developers,” UBS’s Wang said. “For developer financing to fundamentally and sustainably improve, property sales must stop falling and begin to recover, which may require further policy efforts to stabilize the property market.”
Real estate problems are just one of several factors that have weighed on Chinese investor sentiment. The massive real estate sector has slowed growth and, along with a slump in exports and weak consumption, has prevented the economy from recovering from the pandemic as quickly as expected.
Stocks in mainland China and Hong Kong have fallen steadily to multi-year lows.
Share prices rose this week after a series of government announcements and media reports suggested impending government support for growth and capital markets.
Such efforts to stabilize the stock market help create a floor to prevent the market from capitulating and falling further, Winnie Wu, chief China equity strategist at Bank of America, said Thursday on CNBC's “Street.” Signs Asia”.
However, she noted that a fundamental turnaround in the economy is needed for investors to return to Chinese stocks, which will take time.
The world's second-largest economy grew 5.2% in 2023, according to official figures released last week. This is a significant slowdown from the double-digit growth of previous decades.
Chinese Premier Li Qiang on Monday called for far stricter measures to boost market stability and confidence, according to an official statement.
On Tuesday, Bloomberg News, citing people familiar with the matter, said Chinese authorities want to use state-owned companies' funds to stabilize the market in a package worth about 2 trillion yuan ($278 billion).
PBOC Governor Pan did not mention such a fund on Wednesday, although he took the initiative to talk about capital markets, Citi's Philip Yin and a team pointed out in a report. They said the 2 trillion yuan of capital would need to be deployed over weeks or months given current regulations and would represent only a fraction of current trading volume.
HAIAN, CHINA – JANUARY 24, 2024 – An employee of the personal finance department of a bank counts and arranges the RMB deposited by customers in the daily account in Haian city, Jiangsu province, China, January 24, 2024. (Image credit (should be CFOTO /Future Publishing via Getty Images)
Future publishing | Future publishing | Getty Images
“Importantly, it does not appear to be enough to have a real impact on the underlying challenges in the economy,” Citi analysts said.
For many consumers and businesses in China, uncertainty about the future remains high after the Chinese government's recent crackdown on internet technology companies, the gaming sector, after-school education companies and real estate developers.
Tensions between the US and China, centered on technology competition, have also weighed on sentiment.
Since last summer, Chinese authorities have made it a priority to support the non-governmental, private sector.
“Ultimately, fundamentals will be put back on track by a significant improvement in confidence and sentiment – which is why the latest actions are designed to boost confidence,” said David Chao, global market strategist for Asia Pacific (ex-Japan) at Invesco.
“The path to economic normalization lies in the wallets of Chinese households and businesses rather than China's stimulus plan,” he told CNBC.
But markets have generally been waiting for further action. Chinese authorities announced the issuance of 1 trillion yuan of government bonds back in October, accompanied by a rare increase in the deficit.
“To address macroeconomic challenges, it is still necessary to open the monetary box even further – with broader fiscal policy and easing of deleveraging policies,” Citi analysts said.
Governor Pan's comments about the narrowing gap between U.S. and Chinese monetary policy are “pointers to further monetary easing in the future, particularly as the Fed expects monetary policy easing later in the year,” it said the report.
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China is expected to hold its annual parliamentary session in March, where it could announce a wider budget deficit and other measures for the coming year.
The Economist Intelligence Unit said in its China 2024 outlook on Thursday that China's leaders could target 5% growth next year with the help of greater fiscal support.
The report noted that Chinese leaders called for a new round of tax reform during their annual central economic work conference in December. These details could be released at the third plenary session of the Central Committee of the Communist Party of China, which is “likely to be held in early 2024,” EIU added.
—CNBC's Clement Tan contributed to this report.