context: In a bid to kickstart the economy in 2024, Beijing aims to provide early policy support. This includes issuing additional sovereign bonds in October 2023, half of which are to be spent in H1 2024, and restarting the PSL (pledged supplementary lending) program to fund the ‘three big projects’. These policy efforts reflect Beijing’s attempt to convey to the market its commitment to addressing the current economic woes.
PBoC (People’s Bank of China) will lower the RRR (reserve requirement ratio) for banks by 0.5 percentage points in early February 2024, Pan Gongsheng 潘功胜 PBoC governor announced at a surprise news conference on 24 January 2024.
PBoC will also lower the re-lending and re-discount interest rate by 0.25 percentage points to 1.75 percent for the ag sector and small enterprise loans.
Lowering the RRR frees up liquidity, providing banks with more money to lend and stimulating spending in the broader economy. The 0.5 percentage point cut to the RRR is expected to inject C¥1 tn in long-term liquidity into the market, notes Pan.
With the gap between US and PRC monetary policy likely narrowing in 2024, policymakers have more autonomy in expanding monetary stimulus, adds Pan.
The RRR exceeded expectations, suggests Zhou Maohua 周茂华 China Everbright Bank macro researcher. The cut would not only boost consumption and domestic demand, but it would also improve investors’ expectations of the capital market.
Based on past experience, an RRR cut is expected to provide liquidity support to the capital market, particularly for listed companies in sectors such as banking, real estate, manufacturing and consumption, boosting investor confidence, contends Lian Ping 连平 Chair of the China Chief Economist Forum. This is a timely measure, especially considering the rough start of the year for stock and bond markets, which has hampered investor confidence.