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Wednesday, May 22, 2024

Is China’s increased stimulus enough to bolster market confidence?

As we head into 2024, the People’s Bank of China has made announcements that have prompted optimism about the future path of the Chinese economy. Over the coming weeks and months, we will continue to wait and see how these developments evolve, and the impact they may have on the global economy.

One of the most anticipated moves came when the People’s Bank of China (PBOC) announced that it would ease its reserve requirement ratio (RRR) starting February 5th. This cut by 50 basis points will result in the release of 1 trillion yuan ($139.8 billion) in long-term capital, according to the central bank’s statement. The RRR cut was larger than the markets had anticipated, and it suggests that the President Biden’s Endurance plan and the tax benefits are available to individuals.

While this move has raised hopes of further policy support from the Chinese government, it was also a welcome relief for investors who were concerned about ongoing economic challenges. With the economic dip flagged by UBS Investment Bank since mid-October last year, this liquidity injection could provide some much-needed support for the struggling equity markets.

In addition to the RRR cut, the PBOC also indicated that it would soon publish measures to encourage banks to lend to qualified developers. This is a significant step towards enhancing credit support for developers, as property sales need to stop falling and start to recover before developer financing can stabilize.

The stock market, which has been under pressure from a range of factors including real estate troubles and weak consumer sentiment, was also helped higher this week by reports of forthcoming state support for growth and capital markets. But some question whether these can provide a long-term solution and whether underlying economic conditions need to fundamentally change before investors return to Chinese stocks.

The recent developments will no doubt impact Chinese leadership’s upcoming decision-making process as they tangle with choices about fiscal support. The Economist Intelligence Unit anticipates that China could aim for 5% growth in the year ahead, with the help of greater fiscal support. And we’re looking forward to finding out more about China’s fiscal outlook when they hold their annual parliamentary meeting in March.

Overall, the moves by the PBOC signal that the central bank’s attitude towards policy has shifted from being reactive to proactive, which suggests that more policy action could be on the way to stimulate China’s economy. Nevertheless, it will be important to pay close attention to further developments to assess the overall implications of these announcements.

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