Chinese Stocks Rebound on RRR Cut, PBOC Promises
China’s benchmark stock indexes have experienced a notable rebound this week, following the unexpected rollout of more monetary stimulus by the People’s Bank of China (PBOC). The PBOC surprised markets by cutting its reserve requirement ratio (RRR) rate by 50 basis points on Wednesday. The RRR rate determines the amount of capital reserves that local banks must maintain, and this cut released approximately $140 billion in liquidity that can now be used to support the economy. Additionally, the PBOC relaxed lending requirements for the struggling property sector and promised further measures to spur growth. The bluechip index in China rose by almost 2.7% over two days, reaching a two-week high, while the CSI 300 Index climbed by nearly 4%. These gains extended the indexes’ rebound from multi-year lows. In Hong Kong, the stock market index surged by almost 10% from 15-month lows, supported by the positive sentiment towards Chinese markets.
While the RRR cut and the PBOC’s liquidity promises provided some short-term assistance to Chinese markets, analysts have raised doubts about the actual impact on economic growth. The PBOC is also facing limited room to provide additional monetary stimulus, as it had recently maintained its benchmark interest rate at record lows. Chinese consumer and capital spending remains weak, with the country experiencing persistent deflation for three consecutive months. Capital investment has also decelerated significantly over the past year, and concerns about the economy have deterred foreign inflows. ING analysts stated that they expect the positive impact of the RRR cut and supplementary measures on the economy to be relatively limited, and they question whether there is sufficient demand for high-quality loans to fully benefit from the liquidity injection.
As monetary stimulus yields limited results, investors are increasingly calling for Beijing to implement more targeted fiscal measures. However, the government’s ability to do so is constrained by high debt levels. Chinese data for January, which is expected to offer more insights into business activity after a lackluster 2023, will be released next week. Additionally, the upcoming Lunar New Year holiday could potentially stimulate growth.
Analyst comment
Positive news: Chinese stocks rebound on RRR cut, PBOC promises.
As an analyst, I expect the market to continue its rebound in the short term due to the RRR cut and additional measures announced by the PBOC. However, the limited impact of monetary stimulus and concerns over economic growth may hinder long-term gains. Housing and consumption sectors remain weak. Investors are calling for more fiscal measures, but high debt levels constrain the government’s capacity. Investors will look to upcoming Chinese data for January for further guidance.
