China's central bank will cut the amount of cash that banks must hold as reserves from Feb. 5, governor Pan Gongsheng said on Wednesday, the first such cut for the year as policymakers extend efforts to shore up a fragile economic recovery. The People's Bank of China (PBOC) would cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps), thereby freeing up 1 trillion yuan ($139.45 billion) to the market.
Chinese blue-chip stocks (.SSEC), opens new tab, which hit five-year lows earlier this week, bounced 1.8% on the day. Hong Kong's benchmark index (.HSI), opens new tab soared by 3.6%, having endured its most volatile start to the year since 2020 and after plunging on Monday to 15-month lows.
"In our opinion, the incentive to reduce exposure is pretty powerful and so we think this provides a pause, but we’re worried that any recovery will be an opportunity to de-risk." "We need more powerful forces. Two powerful forces are, one, maybe more transparency in terms of the direction of regulation and policy…an additional support actually will come from the U.S. in terms of the Fed - a cutting cycle provides liquidity not just to the U.S. market but externally and typically that comes from a weaker dollar. And with liquidity you get animal spirits."
"The RRR cut is what the economy needs, and the recent weakened sentiment may have just brought the timing forward. It offers the certainty that the government is willing to stabilise the economy, but it is also unlikely to be a fully lax monetary policy mode. Consumption and real estate data after the Spring Festival will be critical for any anticipation of further easing."
"The cut has been well anticipated, but the market was unsure about the exact timing. The long-term liquidity can facilitate banks to extend loans, or - in an environment where loan demand may be weak, the liquidity released can support bond issuances thereby fiscal stimulus." "It underlines our medium-term upward bias to yuan rates and CGB (Chinese government bond) yields as markets shall ultimately respond to the better growth outlook resulting from various support measures, and if bond supply is coming through." "We maintain a 10-year CGB yield expectation at 2.70-2.80% by year-end."
"It's part of the toolbox where they are taking incremental steps basically to put a floor under economic activity and potentially financial markets." "We're still very, far from any kind of decisive policy intervention to really change the economic direction of the country. Rather, it's a continuation of the small steps we've seen." "It does put a floor under Chinese growth, and certainly allows some form of stability."
"The scale of 50-bps cut is larger than expected, but the timing of a cut before the Lunar New Year might not be a big surprise to some extent, especially after a stock market rescue plan announcement earlier. Furthermore, another policy announcement for property developers will be out soon, as the PBOC hinted." "We would like to wait to see a full set of policy supports before concluding the impact on the overall market."
"In the short-term, it will be a positive for Chinese equities, but in the medium-to-long-term, it's difficult to say if it will have a significant impact on the economy." "The only way to see more positive flows back into the stock market is to have some new stimulus that directly boosts confidence among consumers."
"It’s worth bearing in mind that this’ll be the third cut in a year. It'll be more than the previous ones, which were 25 bps each. But it's just injecting more liquidity in the system and it does seem that there's a growing lack of demand and consumption. The economic situation is poor so people aren’t in any urgency to borrow money." "I think the more important thing is yesterday's news about the stock market rescue package, so that might be a reason to keep downside pressure on dollar/renminbi", (because it would reportedly involve off-shore funds buying Chinese stocks through Hong Kong, likely involving selling dollars for yuan).
