China cuts bank reserve ratio to boost growth as sentiment sours

China’s central bank will next month cut the amount of reserves banks must maintain, a move that is part of efforts to boost growth as investors sour on the outlook for the world’s second-largest economy.

The 0.5 percentage point cut to the People’s Bank of China’s reserve requirement ratio, announced by PBoC governor Pan Gongsheng on Wednesday, will inject Rmb1tn ($140bn) of liquidity into the financial system.

Pan pledged to support growth this year with “countercyclical” adjustments, telling a news conference in Beijing the central bank would “create a good monetary and financial environment for the economy”.

The governor also said he expected less pressure on China’s foreign exchange rate in 2024 if market predictions the US Federal Reserve would begin easing rates were borne out.

Pan’s comments, in which he also said China’s economy was recovering and its financial markets were stable, follow a brutal sell-off in Chinese stocks this month on investor concerns over the outlook for economic growth and corporate earnings.

Chinese authorities are tightening limits on capital outflows as part of efforts to halt the protracted selling, but investors remain sceptical about the government’s willingness to shore up an economy whose growth has fallen to decade lows.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Fang Fenglei, founder of Hopu Investments and a renowned Chinese dealmaker, told the Asian Financial Forum in Hong Kong that the PBoC’s cut to the reserve rate was “good news” but he was unsure if it would “boost the capital market”.

“Most importantly, they should cut interest rates as well because interest rates are still very high,” Fang said through a translator, adding that high interest rates would “stifle consumption”.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the reserve cut was a “step in the right direction”, but called on the government to channel more funds towards consumption rather than industry.

“The allocation of fiscal resources to consumption instead of investment is critical, as China faces deflationary pressure. China needs stronger domestic demand instead of more production capacity,” he said.

Pan told reporters that “now that China’s economy is recovering, we have greater room for manoeuvre in terms of macro policy”.

“The capital market has a solid foundation for steady development,” he said, citing a meeting led by China’s Premier Li Qiang this week at which the country’s second-most senior cadre called for efforts to shore up investor confidence.

Pan vowed to “stabilise the market and strengthen confidence and the momentum of the recovery”.

On the renminbi, which fell about 5 per cent against the dollar over the past year as high US interest rates increased selling pressure on China’s currency, Pan predicted the central bank would have more “space” for policymaking this year.

“The misalignment of the monetary policy cycles between China and the United States is expected to improve, which will facilitate the stabilisation and convergence of interest rate differentials between China and the US,” Pan said.

In a reference to deflationary pressures in the economy, Pan said that when inflation in the US and eurozone suddenly fell from levels of about 10 per cent to 3 per cent, this caught central banks around the world by surprise and had an impact on China’s prices.

“Inflation in developed economies dropped from maybe the 10th floor to the third floor while that of China has dropped from the second floor to the first floor,” Pan said.

But he acknowledged domestic factors were also behind China’s weak prices. Economists say the gross domestic product deflator, a broad measure of prices in the economy, has had its longest deflationary streak since the late 1990s.

“Domestically, due to insufficient effective demand, overcapacity in some industries, weak social expectations and low price levels, [the consumer price index] increased by 0.2 per cent in 2023, significantly lower than the previous year,” Pan said. CPI rose 2 per cent in 2022.

But Pan added: “International organisations, such as the IMF and other institutions, predict that China’s price level in 2024 will recover moderately.” The IMF is forecasting China’s CPI will rise 1.7 per cent year on year in 2024 while GDP will grow 4.2 per cent, compared with 5.2 per cent last year.

Additional reporting by Kaye Wiggins in Hong Kong