China’s central bank cuts reserve requirement ratio by 0.5% to bolster economy amid market volatility

Governor Pan Gongsheng revealed on Wednesday that the RRR would be cut by 0.5% starting from February 5, marking the most substantial reduction since December 2021. This decision is anticipated to release approximately 1 trillion yuan (£110.8bn) in the form of new loans.

China’s central bank, the People’s Bank of China (PBOC), has announced a reduction in the reserve requirement ratio (RRR) in a move to stimulate lending to households and businesses.

Governor Pan Gongsheng revealed on Wednesday that the RRR would be cut by 0.5% starting from February 5, marking the most substantial reduction since December 2021. This decision is anticipated to release approximately 1 trillion yuan (£110.8bn) in the form of new loans.

The move comes as Chinese authorities strive to stabilize the country’s stock markets, which have posed challenges to China’s economic stability. Following the announcement, the Hang Seng index experienced a robust closing on Wednesday, up by 3.6%, signalling improved market sentiment.

While economists had predicted a rate cut later in the year, the surprise decision raises the possibility of a more comprehensive stimulus package, rumoured to be around 2 trillion yuan, which may be announced later this week. The Chinese government, however, appears to be adopting a cautious approach, emphasizing “prudent monetary policies.” Premier Li Qiang recently stated that China does not seek short-term growth.

The central bank’s move is expected to provide stability to China’s economic growth, but some analysts argue that more decisive policy interventions are necessary to alter the country’s economic trajectory significantly.

China’s economy heavily relies on the property sector, contributing between a quarter and a third of its GDP. The sector has struggled to recover from the effects of the COVID-19 pandemic and regulatory challenges in 2020, impacting major property developers like Evergrande and Country Garden.

Confidence in the economy remains low, despite recent measures to support the property sector, including plans to expedite loan approvals for property developers. The demand for new homes has remained sluggish, with a significant drop in the value of new home sales among the 100 largest real estate companies in 2023. The sector’s struggles have created a challenging economic environment that is difficult to overcome.