PBOC monetary policy to loosen in bid to bolster China’s economy, stocks rally on news 

Chinese stocks saw a late surge in Asia trading on Wednesday following an announcement by the country's central bank, the People's Bank of China (PBOC), signaling an imminent loosening of monetary policy to bolster the struggling economy. 

Governor Pan Gongsheng revealed during a press briefing that the reserve requirement ratio (RRR) for banks would be reduced by 0.5 percentage points on February 5th. This move, affecting the amount of cash Chinese banks have to maintain in their reserves, is expected to inject 1 trillion yuan ($139 billion) in long-term liquidity into the market, Gongsheng said. 

“Announcing an RRR cut in advance suggests there’s no other effective tools available to stem the market rout,” Shen Meng, managing director at Beijing-based Chanson & Co, told Bloomberg. 

The decision to free up bank liquidity, thereby enabling the financial sector to increase lending, has traditionally been a tool used by the PBOC to stimulate economic growth. The announcement comes at a time when China's economy continues to face challenges in fully recovering from the impact of COVID lockdowns. 

A downturn in the heavily-indebted Chinese property sector has contributed to suppressed consumer sentiment and economic activity.  

Political tensions between Beijing and the West have led to a reduction in foreign direct investment and added to the economic challenges. These factors pushed the Shanghai Composite stock index near a five-year low as of the beginning of this week.  

Kevin Net, head of Asian equities at Tocqueville Finance SA, told Bloomberg News:  

“An RRR cut helps sentiment in the sense that the action seems more decisive. But some investors may use this as an exit opportunity if there is such short-term market rebound — unless there are more policies to address structural issues, like those with the property market.” 

Shanghai Composite, Hang Seng Index extend gains on Wednesday on PBOC comments 

On Tuesday, reports suggested that Beijing was considering a $287 billion fund to stabilize equity markets, prompting benchmark indices to recover from lows and boosting Chinese stock markets. The Shanghai Composite gained 0.5%, while Hong Kong's Hang Seng index bounced 2.6% from a 14-month trough. 

Following the PBOC's announcement on Wednesday, those gains extended, with the Shanghai Composite rising by 1.8% and the Hang Seng surging by 3.6%. The Hong Kong-traded ChinaAMC CSI 300 Index ETF also saw a rise of 2.23%. In premarket trading, the U.S.-traded iShares MSCI China ETF saw a 2.8% increase. 

In a comment cited by MarketWatch, former PIMCO CEO Mohamed El-Erian, currently an adviser to Allianz and Gramercy, noted that the PBOC's policy measure underscores the significant pressure China's policymakers are under to stimulate the economy. 

He added: 
 

“This measure is likely to have only a marginal impact on growth prospects. Supplementing it with other — fiscal-based — stimulus measures would do more to boost growth…” 

 
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management Ltd., broadly agreed with El-Erian in a comment to Bloomberg: 
 

"[The RRR cut is] another step in the right direction, but monetary policy by itself is not enough to boost economic momentum. A more proactive fiscal stance focusing on consumption is more important and effective.”