The People’s Bank of China (PBOC), has announced several rate cuts and a lowering of the reserve requirement ratio (RRR) for banks in an important effort to support its flagging economy. One of the most significant monetary policy changes in recent memory, this one was unveiled in late September 2024 with the goals of boosting financial markets, cutting borrowing costs, and supplying the economy with liquidity.
The Policy Measures:
By lowering the RRR by 50 basis points, the PBOC is predicted to add RMB 1 trillion to the system. This action enables banks to extend more credit, which should lower capital costs and promote investment. The 7-day reverse repo rate was lowered by 20 basis points to 1.5%, while the 1-year medium-term lending facility (MLF) rate was lowered by 30 basis points in tandem with the RRR reduction. The purpose of these modifications is to lower the cost of short- and medium-term funds for banks. Along with loosening regulations on buying a second house, outstanding mortgage rates were also lowered, indicating an effort to boost the struggling real estate market. The PBOC hinted at the establishment of a stabilisation fund to directly support the equities markets by stating that funds and brokers might use central bank cash to buy stocks.
Market Reactions and Analysis:
China’s main stock indices surged immediately after the announcement, with futures for the FTSE China A50 Index, for example, rising by 1%. Investor confidence in the policy’s ability to support asset values and boost economic activity is reflected in this response. The actions were perceived by investors worldwide as a strong indication from the Chinese government to combat economic slowdown, which might have a beneficial impact on market sentiment by sending a proactive message against a downturn. Although China’s long-term economic plan is called into question, the policy’s design intends to stimulate the economy in the short term. If structural reforms are not balanced with an over-reliance on monetary policy to promote growth, asset bubbles or inflation may result. Increasing liquidity could lead to overborrowing, especially in industries where excessive debt levels among developers have been a major worry, like real estate.
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