BANGKOK — The Chinese central bank has announced a series of measures to support the country’s slowing economy, including a cut in the amount of reserves it holds for banks. This move has already had a positive impact on the markets, with Hong Kong’s benchmark index jumping 3.6%.
The Chinese stock markets have been struggling in recent months as investors have pulled out their money, worried about the slow recovery from the COVID-19 pandemic. To counter this, there were reports earlier this week that the government planned to use state-owned investment companies to funnel offshore funds into the markets. However, the central bank’s actions seem to be a coordinated effort to stabilize the markets and instill confidence in the economy.
Governor of the People’s Bank of China, Pan Gongsheng, announced at a news conference in Beijing that the deposit reserve requirement would be cut by 0.5 percentage points as of February 5th. This move is expected to inject around 1 trillion yuan or $141 billion into the economy. Currently, the reserve requirement ratio stands at 7.4%.
Unlike bank reserves, which are the cash banks must keep on hand for unexpected demand, these reserves are held by the central bank and used as a monetary policy tool. Usually, such changes are conveyed through a written notice, making this announcement at a news conference a significant move.
In addition to the reserve cut, the central bank also plans to issue a policy soon on lending to property developers in order to support the industry. Pan Gongsheng stated that China’s economy is recovering, allowing room for policy maneuvers. He also said that the country’s financial risks are under control, with sound operations of financial institutions and smooth functioning of financial markets, as reported by the government website China.com.
The Chinese economy grew at an annual pace of 5.2% in the October-December quarter, meeting the government’s target of around 5% annual growth for 2023. However, the recovery is still uneven, and most forecasts predict slower growth in 2024. To counter this, Chinese leaders have been aggressively promoting the economy to boost confidence and counter negative expectations.
Initial reactions to the central bank’s announcement were cautious. According to Mark Williams of Capital Economics, these measures will only provide a small boost to the economy. He believes that significant improvements in borrowing by households and businesses would require substantial rate cuts or a change in economic sentiment, which doesn’t seem likely in the near future.
The slow pace of the recovery, coupled with the crisis in the property market, has added to the overall gloom. Dozens of developers have defaulted on loans, and the government’s crackdown on excessive borrowing a few years ago has left many Chinese families who invested their life savings in unbuilt homes in limbo.
However, there have been some signs of improvement. Last week, the government resumed reporting on the rate of unemployment among young people, which had reached a record high of 21.3% in June. According to the revised methodology, the latest youth unemployment rate stands at 15%, while the overall unemployment rate is at 5.1%.
The crackdown on technology companies, which tend to hire younger workers, has also left many youths without jobs. Additionally, moves to impose more controls on online gaming led to massive sell-offs of game company shares, prompting the authorities to backtrack on their plans.
While major central banks like the Federal Reserve have been raising interest rates to curb inflation, China is facing the opposite problem. Weak demand could cause prices to spiral lower, discouraging investment and hindering growth. The central bank’s actions this week, including easing credit and injecting money into the economy, aim to stimulate spending by businesses and consumers.
Currently, China’s loan prime rate is at 3.45%, which is the benchmark rate for other loans given by commercial banks to their highest quality customers. In comparison, the Federal Reserve’s benchmark rate stands at around 5.4%. The central bank had already cut the reserve requirement twice in 2023, by 0.25 percentage points each time. This policy tool, which helps control the amount of money circulating in the economy, is now at its lowest level since the early 2000s, after peaking at over 20% in 2011.
Analysts believe that the central bank’s actions may not be enough to fully reassure investors, and more needs to be done to implement wider reforms. According to Raymond Yeung of
