China stocks jump again on plan for $139 billion cut to bank reserves

Chinese stocks jumped late in Asia trading Wednesday after the country’s central bank said it would soon loosen monetary policy to support the ailing economy.

Peoples Bank of China Governor Pan Gongsheng said at a press briefing that the reserve requirement ratio for banks would be cut by 0.5 percentage points on February 5th.

Reducing the RRR, which determines how much cash banks must keep in their reserves, should provide 1 trillion yuan ($139 billion) in long-term liquidity to the market, Gongsheng said.

Allowing the financial sector to lend more, by freeing up bank liquidity, has long been a PBOC tool for boosting growth, and the announcement comes as China’s economy has struggled to fully bounce back since the COVID lockdowns.

Consumer sentiment and economic activity has been suppressed by a crash in the heavily-indebted property sector. Political tensions between Beijing and the West, which has contributed to a reduction in foreign direct investment, has added to the malaise, and pushed the Shanghai Composite stock index
CN:SHCOMP
to near a five-year low by the start of this week.

Reports on Tuesday that Beijing was considering a $287 billion fund to stabilize the equity markets, helped benchmark indices to move off lows, with the Shanghai Composite gaining 0.5%, and Hong Kong’s Hang Seng index
HK:HSI
bouncing 2.6% from a 14-month trough.

And those gains were extended following Wednesday’s PBOC announcement, with the Shanghai Composite adding 1.8% and the Hang Seng jumping 3.6%.

The PBOC’s policy measure announced Wednesday shows how much pressure China’s policymakers are under to stimulate the economy, according to Mohamed El-Erian, adviser to Allianz and Gramercy.

But he added: “This measure is likely to have only a marginal impact on growth prospects. Supplementing it with other — fiscal-based — stimulus measures would do more to boost growth…”

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