China’s Central Bank Announces Measures to Boost Economy

China’s central bank revealed on Wednesday that it would decrease the reserves held for banks as part of a comprehensive strategy to bolster the slowing economy. Following this announcement by the governor of the People’s Bank of China, Hong Kong’s benchmark experienced a significant 3.6% surge.

In recent months, Chinese stock markets faced a downturn as investors withdrew funds, apprehensive about the country’s hesitant recovery from the COVID-19 pandemic. Amid unconfirmed reports that the government planned to redirect offshore funds into the markets, the central bank’s move appears to be a coordinated effort to stabilise the markets and restore confidence in the world’s second-largest economy.

During a press conference in Beijing, Central Bank Governor Pan Gongsheng disclosed that the deposit reserve requirement would be reduced by 0.5 percentage points starting from Feb. 5, injecting approximately 1 trillion yuan ($141 billion) into the economy. Unlike bank reserves, which banks hold to cover unexpected demand, these reserves are held by the central bank and primarily used as a monetary policy tool.

Governor Pan also indicated that the central bank plans to issue a policy soon regarding lending to property developers to support the struggling industry. Despite the recovery of China’s economy, challenges persist, leading to cautious reactions from analysts.

Mark Williams of Capital Economics remarked that the announced measures would offer only a modest boost, emphasising that meaningful improvements would require substantial rate cuts or a significant change in economic sentiment. The uneven recovery, particularly in the property market, has contributed to concerns, with many families left uncertain about the delivery of their invested but unbuilt homes.

While China’s economy expanded at a 5.2% annual pace in the October-December quarter, meeting the government’s target for 2023, forecasts suggest slower growth in 2024. Chinese leaders have been working to counter these expectations, but analysts remain skeptical about the potential impact of the recent central bank moves.

Regulators in China are grappling with the risk of weak demand leading to deflation, prompting the central bank to ease credit and inject money into the economy. Analysts suggest that these actions might not be sufficient to fully reassure investors, and broader reforms may be necessary to boost private sector confidence and address long-term concerns in the real estate sector.