China’s central bank announced a 50 basis point cut to banks’ reserve requirement ratio (RRR) on January 24th, freeing up approximately 1.4 trillion yuan ($206 billion) to bolster the country’s slowing economy. The move comes amidst increasing concerns over China’s economic growth prospects and efforts to restore market confidence.
Steady Decline in Growth Momentum
Economic indicators in recent months point to a steady decline in China’s growth momentum. Full year 2023 GDP growth came in at 2.9%, well below the government’s target of around 5.5%. [1] Fourth quarter GDP printed at 1.7% on an annualized basis, the slowest pace since the initial COVID outbreak in 2020. [2] Retail sales growth for December slumped to just 1.0%, while industrial output grew 1.3% and fixed asset investment increased a meager 5.1%. [3]
The weak economic figures led some analysts to speculate that China could miss its 2023 growth target by the biggest margin on record. [4]
| Economic Indicator | 2023 Target | Actual |
|---|---|---|
| GDP Growth | ~5.5% | 2.9% |
| Retail Sales Growth | ~5% | 0.7% |
| Fixed Asset Investment Growth | ~5% | 5.1% |
Table 1. China’s key economic indicators compared to 2023 targets
Mounting Pressures Across Multiple Fronts
China faces mounting pressures across multiple fronts:
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Shifting demographics: China’s population declined in 2022 for the first time in over 60 years. An aging population and declining birth rates will weigh on future growth.
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Property market turmoil: Ongoing troubles in China’s property sector, accounting for 25-30% of GDP, continue to drag on the broader economy. Home prices fell for the fifth straight month in December. [4]
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Zero-COVID policy reversal: Rapid dismantling of China’s strict zero-COVID policy led to a surge in infections, disrupting consumer spending and factory output. Although necessary in the long run, the abrupt U-turn fueled significant short-term uncertainty.
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Geopolitical tensions: Deteriorating China-US relations over Taiwan and technology export restrictions imposed on Chinese companies have weighed heavily on market sentiment.
Steep Stock Market Declines Prompt Policy Response
Since the beginning of 2023, Chinese stocks have been suffering from heavy foreign outflows. Hong Kong’s Hang Seng Index entered bear market territory on January 3rd, down over 20% from its recent peak. [5] The CSI 300 Index of major Shanghai/Shenzen-listed companies similarly posted year-to-date declines exceeding 15%. [6]
The sharp stock market declines raised fears of potential broader risks to China’s already fragile financial system. In response, Chinese policymakers pivoted towards aggressive, targeted stimulus measures to restore market confidence. [7]
Reserve Requirement Ratio Cut to Inject Liquidity
As part of these efforts, the PBOC announced a 50 bps cut to the RRR on January 24th, just before markets opened for lunar new year holidays. [8] The RRR dictates the proportion of customer deposits banks must hold as reserves with the central bank. The cut to the RRR frees up capital for banks to lend out into the real economy. [9]
The latest reduction follows several RRR cuts over the past year. But it still exceeded market expectations of a 25 bps cut. [10] In total, the RRR now stands at 7.8% for large banks and 6.8% for smaller banks, implying a $206 billion overall liquidity injection. [11]
Bolstering Market Confidence
The RRR cut aims to bolster market confidence after stocks plunged. [12] So far, it appears to be working – mainland Chinese shares surged following the announcement. [13] Hong Kong stocks similarly rebounded over 2% and signaled optimism about additional forthcoming stimulus. [14]
The move was also well calibrated to minimize risks of capital outflow. With most major stock exchanges closed for holidays, the PBOC avoided spurring further currency weakness. [15] The yuan rallied 0.5% against the U.S. dollar following the announcement. [16]
Prop Up Economic Growth, With Caveats
The latest stimulus reinforces authorities’ commitment to defend their 5.5% growth target for 2024. [17] But meeting the ambitious target still remains unlikely given persistent headwinds. Population declines and production bottlenecks will continue hampering growth fundamentals even with looser financial conditions. [18]
Moreover, some analysts argue the latest RRR cut delays necessary structural reforms. Rather than relying on credit growth, China needs to focus on transitioning towards a consumption and services-driven economy. [19] State-driven infrastructure investment can provide only a temporary boost.
Additional Targeted Measures Still Needed
Markets expect further incremental policy easing from the PBOC if growth continues decelerating. [20] But authorities prefer using precise, tailored measures rather than massive monetary stimulus. More moderate, targeted steps likely include:
- Direct funding for infrastructure projects
- Support for private companies via re-lending programs
- Cuts to mortgage rates and down payment requirements
Such policies would limit risks of overheating the economy. They would also buy time for Covid-disrupted supply chains to recover and lay foundations for more sustainable growth ahead. [21]
Financial Markets Impact Beyond China
Though intended to aid China’s economy specifically, the stimulus measures could produce spillover effects globally if successful. Stock markets across Asia edged upwards following signs of China’s central bank commitment to market stability. [22] Some analysts noted potential boosts to commodities like oil and industrial metals as well if Chinese construction rebounds. [23]
However, tighter global financial conditions driven by interest rates hikes elsewhere may limit the potency of China’s easing efforts. The U.S. Federal Reserve just signaled further rate increases ahead judging inflation still too high, even as pressures ease. [24]
On net though, China’s policy stimulus brings welcome news for struggling global equity markets desperate for some positive momentum. It at least staves off potential systemic risks emanating from China into the rest of the world. [25] For now markets are cheering the moves – whether they make any material difference for the economy in 2024 however remains to be seen.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
