China surprises everyone with this decision to curb the crisis

China in crisis is moving to avoid the worst: the central bank will cut the amount of liquidity that banks must hold as reserves starting from February 5th.
The announcement, partly a surprise given the reluctance so far to provide massive stimulus to the economy, launches the first cut of the year, as policymakers extend efforts to support a fragile economic recovery amid a slump in stock markets.
The PBOC also said there is room for further easing of monetary policy.
Reducing the reserve requirements that banks must maintain will increase lenders' ability to extend loans and stimulate spending.
The announcement of an RRR cut during a press conference was unusual for China's central bank, which tends to signal such moves with statements posted on its website.
The move is a further indication of Beijing's urgency to stimulate very pessimistic and uncertain sentiment among investors.
China, green light to cut the bank reserve ratio.
What does it mean? People's Bank of China Governor Pan Gongsheng said at a news conference in Beijing that he would cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps).
This move, he specified, potentially frees up 1 trillion yuan ($139.45 billion) into the market.
This is the largest such cut since December 2021, exceeding most analysts' expectations.
This reduction follows previous cuts of 25 basis points for all banks made in March and September last year.
Along with the reserve ratio, Pan also said the central bank would lower interest rates from Thursday on the repayment of funds provided to banks that incentivize lending to the agricultural sector and small businesses.
He added that the PBOC will unveil an adjustment to lending policies related to commercial property – a move that will expand the amount of funds available to real estate developers and improve their liquidity conditions.
Following the announcement, the onshore yuan hit 7.1601, its strongest level since January 12.
The Hang Seng China Enterprises Index extended gains and recorded its biggest two-day rise since November 2022.
Beijing is seeking to support growth in a targeted manner, while planning a deleveraging of the real estate sector, with some of the its biggest promoters who are facing serious debt problems.
The financial risks of the dragon have thus multiplied and have put consumer and investor confidence to the test.
The dragon stock market slumped 13% in 2023 and continued to slide into the new year due to incessant foreign selling.
The blue chip CSI300 index plunged to five-year lows earlier this week.
read also China alarm, sell-off of 6,000 billion dollars of shares in 2 years What to really expect about the crisis in China? Some predictions Critical issues regarding the bank's surprise move are not lacking in the experts' initial comments.
China's economic fortunes are attracting global attention.
The RRR cut is “another step in the right direction, but monetary policy alone is not enough to revive economic momentum,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management Ltd.
“A fiscal strategy that incentivizes consumption is more important and effective." read also Here's how China is exporting deflation to the world “A cut in the RRR helps sentiment, in the sense that the action seems more decisive,” said Kevin Net, head of Asian equities at Tocqueville Finance SA.
“But some investors may use this opportunity for an exit from the China market in the event of a near-term recovery in stocks, unless there are more measures to address structural issues, such as those related to the property market,” he added.
Challenges remain and the banking system is still in trouble according to Tim Graf, head of EMEA macro strategy at State Street.
Analysts say more stimulus is needed this year to fend off deflationary risks and keep a lid on unemployment.
Essentially, China needs stronger domestic demand rather than increased production capacity according to Zhiwei Zhang, chief economist at Pinpoint Asset Management.
China's economy grew 5.2% in 2023, hitting the official target, but the recovery has been more fragile than investors expected.