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China has taken action to stimulate its declining economy and improve financial markets by reducing the amount of reserves that banks are required to hold.

China has taken action to stimulate its declining economy and improve financial markets by reducing the amount of reserves that banks are required to hold.

On Wednesday, the central bank of China announced that it will reduce the required reserves for banks as part of a series of actions to assist the decelerating economy.

The statement made by the governor of the People’s Bank of China resulted in a significant increase in stock prices, causing Hong Kong’s main index to rise by 3.6%.

In recent months, Chinese stock markets have struggled as investors have withdrawn funds due to a slow recovery from the impacts of the COVID-19 pandemic.

A decline in stock prices earlier this week was succeeded by unofficial announcements that the government intended to have state-owned investment firms direct foreign funds into the markets in order to reduce the losses. The actions taken by the central bank seem to be a deliberate attempt to stabilize the markets and increase trust in the future of the second-largest global economy.

The governor of the central bank, Pan Gongsheng, announced in a press conference in Beijing that the deposit reserve requirement would be reduced by 0.5% starting on February 5th. This decision is expected to inject approximately 1 trillion yuan (equivalent to $141 billion) into the economy. Currently, the reserve requirement ratio stands at 7.4% as of December.

These reserves, unlike bank reserves which are required to cover sudden demand, are held by the central bank and primarily utilized as a tool for monetary policy.

Typically, the central bank communicates these modifications through a written notification rather than at a press conference.

FILE - Pedestrians wearing face masks walk past the People's Bank of China in Beijing on March 3, 2023.

On March 3, 2023, pedestrians in Beijing were seen wearing face masks as they passed by the People’s Bank of China.

Pan stated that the central bank intends to release a policy in the near future regarding loans to real estate developers in order to provide assistance to the sector.

He mentioned that China’s economy is rebounding, providing plenty of space for policy adjustments.

According to Pan, a statement published on the government website, our nation currently has manageable financial risks, stable performance of financial institutions, and smooth functioning of financial markets.

The economy grew by 5.2% on an annual basis during the October-December quarter, meeting the government’s goal of achieving approximately 5% annual growth by 2023. However, the recovery is not consistent and many predictions suggest that the economy will experience slower growth in 2024.

The leaders of China have been discussing the economy extensively in an attempt to combat these expectations.

At first, people were hesitant.

According to Mark Williams, an economist at Capital Economics, the recent changes will have a limited impact on China’s economy.

In a commentary, he stated that significant reductions in interest rates or a major shift in economic outlook would be necessary for meaningful enhancements in household or corporate borrowing. However, both of these scenarios do not appear to be probable in the near future.

The gradual speed of the economic rebound following China’s relaxation of strict virus prevention measures in late 2022 has contributed to concerns about the ongoing turmoil in the previously thriving real estate industry. Numerous developers have failed to repay loans after the government implemented stricter regulations on borrowing a couple of years ago.

This has caused uncertainty for numerous Chinese families who had used their entire savings to invest in unfinished properties, as they are unsure if the developers will follow through and complete the apartments.

There are indications of progress: In the previous week, the government began reporting on the percentage of unemployed youth, which reached a historic high of 21.3% in June. Using an updated calculation method, the current rate of youth unemployment is 15%. The total unemployment rate is currently at 5.1%.

Numerous young individuals were also unemployed due to the government’s crackdown on technology firms, which typically employed younger employees. In more recent times, efforts to implement stricter regulations on online gaming triggered significant declines in the stock values of gaming companies. This caused the authorities to appear to reverse their initial plan.

Central banks, including the Federal Reserve, have been increasing interest rates and implementing other measures to increase borrowing costs in order to combat inflation. In the United States, inflation reached a high of 9.1% in mid-2022. However, as inflation begins to subside, central banks are now taking steps to ease their monetary policies.

In China, authorities are facing a different challenge – the potential for reduced demand leading to a downward spiral in prices, which could deter investment and hinder growth. This week, the central bank’s actions aim to increase credit and inject funds into the economy in order to encourage businesses and consumers to increase spending.

The current loan prime rate in China stands at 3.45%, which is the interest rate offered by commercial banks to their most creditworthy clients and serves as a reference for other loans. In comparison, the Federal Reserve’s benchmark rate is approximately 5.4%.

The reserve requirement, a vital tool for regulating the flow of money in the economy, was reduced twice in 2023 by 0.25 percentage points each time. It reached its highest point of over 20% in 2011 and is currently at its lowest level since the early 2000s.

According to a report by Raymond Yeung of ANZ, the government is expected to implement further strategies to stabilize market sentiment, possibly by utilizing state resources to bolster the stock market. It is evident that the authorities are prioritizing addressing the state of market sentiment.

Pan, in a statement to journalists in Beijing, stated that the central bank is taking measures to prevent a decrease in the value of the Chinese currency, known as the yuan. He assured that the People’s Bank of China (PBOC) will maintain the stability of the yuan’s value.

According to Yeung and other analysts, the recent actions may not provide sufficient reassurance to investors and further efforts are necessary to promote broader reforms.

He stated that in order to increase private sector confidence and improve the future prospects of the real estate industry, certain changes to the structure must be made. However, he believes that the measures that have been announced thus far are inadequate.