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Opinion | China's central bank moves to spur its slowing economy and boost markets

By Augustus K. Yeung

That China emerged from "zero-Covid" to confront new challenges in a changed world is a stark reality nobody can deny. The nation's economic health is a larger-than-life issue that keeps authorities and economists busy.

China's central bank said on Thursday, January 24 it will cut number of reserves it holds for banks as part of a slew of measures to support the slowing economy. What do you think the market will react to this news announcement? How is this news interpreted?

The announcement by the governor of the People's Bank of China (PBOC) prompted a surge in share prices, with Hong Kong's benchmark jumping 3.6%.

Chinese stock markets have languished in recent months – as investors pulled money out, discouraged by a faltering recovery – from the shocks of the COVID-19 pandemic.

A sell-off earlier in the week was followed by unconfirmed reports – that the government planned to get state-owned investment companies to funnel offshore funds into the markets to help staunch the losses.

The central bank's moves appear to be part of a premeditated, cautious and concerted effort – to stabilize the markets and instill greater confidence in the outlook for the world's second-largest economy, doing what a responsible central government should do.

Central bank Gov. Pan Gongsheng told reporters in Beijing that the deposit reserve requirement would be cut by 0.5 percentage points as of Feb. 5, deliberately freeing more cash reserves for consumptions in the Chinese market.

Pan said that would inject about 1 trillion yuan ($141 billion) into the economy. As of December, the reserve requirement ratio was 7.4%.

Note: Unlike bank reserves – the cash banks must keep money ready to cover unexpected demand – these reserves are held by the central bank and used mainly as a monetary policy tool. (Such changes are usually conveyed in a written notice by the central bank, not at a news conference. This way of conveying message carries greater impact, showing strategy in action.)

Pan said the central bank also plans to issue a policy soon on lending to property developers to help support the sagging property industry.

China's economy is recovering, he reassuringly said, allowing ample room for policy maneuvers.

"At present, our country's financial risks are generally controllable, the overall operations of financial institutions are sound, and financial markets are operating smoothly," the government website China.com cited Pan as saying.

The economy expanded at a 5.2% annual pace in the October-December quarter, enabling the government to attain its target of about 5% annual growth for 2023.

So far so good?

Not exactly: The recovery remains uneven, and some forecasts say the economy will grow more slowly in 2024.

Chinese leaders have been talking up the economy in an all-out effort to counter "cautious optimistic expectations".

Still, initial reactions were cautious. Mark Williams of Capital Economic said the latest moves would "provide only a small boost for China's economy."

"Meaningful improvements in household or corporate borrowing would require substantial rate cuts or a significant change in economic sentiment. Neither seems likely soon," he said in a commentary.

The slow pace of the recovery after China dropped stringent anti-virus precautions in late 2022 has added to gloom over a crisis in the once-booming property market – as dozens of developers defaulted on loans after the government cracked down on excessive borrowing a few years ago.

Over borrowing has left many Chinese families who had invested their life savings in unbuilt homes in limbo – unsure if the developers would deliver those apartments.

There have been some signs of improvement. Last week, the government resumed its reporting on the rate of unemployment among young people. The rate of youth unemployment in 2023 surged to a record of over 21%. It has fallen since to about 15%, but remains perilously high, adding to the urgency to get growth back on track. (Source: MDT/AP)

The economy is a nation's source of wealth, which is what political power and military prowess would be based on.

China's rise is attributed to the great accumulation of wealth – through rapid economic development – which has been attracting foreign investors to the China market. This is an established fact.

Culturally, consumers in China are less willing to spend, especially amid job worries. For example, Alex Shi had been eyeing a 400-yuan (HK440) rice cooker online for weeks, but she eventually abandoned the purchase after considering her cash balance for the rest of the year. Shi, who takes a freelance job in media and communication in Beijing, has felt increasing pressure on her income during the pandemic after some firms slashed their freelance budgets.

With many of her projects having uncertain payment dates, she stopped buying big-ticket items, including cellphones and household appliances, and ate two meals at home every day. "My next gig is probably this Chinese reality TV show at the end of July. I'll be an executive producer. Just for a few days. I can get paid quickly," Shi said. She is among those who receive an annual income below 30,000 yuan.

The world's second-largest economy is betting on the superb spending power of about 1.4 billion people to boost the economy – especially people with an income greater than 200,000 yuan.

Neal Kimberly, a Hong Kong commentator on macroeconomics and financial markets, wrote that "China's central bank has done well in responding to pandemic." He remarked, "Economic data show the PBOC's nuanced strategy has paid off, and it has more room to maneuver if the economic situation worsens."

On Tuesday, January 25, Morgan Stanley economist Robin Xing predicted, "China to deliver decent future growth despite challenges…central bank moves to spur its slowing economy and boost markets by cutting required bank reserves."

The next day, newspapers reported, "Asian shares mostly rise, led by gains in Chinese markets following policy moves."

With U.S.-China relations improving, and the Biden administration focusing on the November presidential election campaign, China's economy will be back on track.

The views do not necessarily reflect those of DotDotNews.


To contact the writer, please direct email: AugustusKYeung@ymail.com

Read more articles by Augustus K. Yeung:

Opinion | China joins U.S., Japan in approving Alzheimer's drug: International cooperation can beat 'AL'

Opinion | China's rapid integration with ASEAN through Pharma firms: Its latest footprints in Singapore


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