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China announced the biggest reduction in bank reserves since 2021

BEIJING, Jan 24 (Reuters) – China’s central bank will cut banks’ minimum reserve requirements from Feb. 5, the first such move in 2024, as policymakers continue efforts to support the economy.

People’s Bank of China (PBOC) Governor Pan Gongsheng said at a press conference in Beijing on Wednesday that the bank would cut the minimum reserve ratio (RRR) for all banks by 50 basis points, adding that the measure would free up 1 trillion yuan. 128.42 billion euros).

This RRR cut, the biggest since December 2021, beats most analysts’ expectations, while two 25 basis point cuts were decided in March and September 2023.

“The RRR cut is a sign that the BPC will remain accommodative throughout this year, although it did not cut the Medium Term Lending Facility (MLF) rate earlier because markets were “waiting for it,” they said. Xu Tianchen, Economist Intelligence Unit economist.

“Politicians also want to ensure the economy gets off to a good start by focusing the political support at the start of the period that will be necessary to achieve the government’s ambitious growth targets.”

The BPC press conference was unusual because the central bank tends to announce such decisions through the publication of a statement on its website outside market hours.

“Challenges are still there and the banking system is still struggling,” said Tim Graf, head of EMEA macro strategy at State Street.

“This is not entirely unexpected and will not be a game-changer. More targeted stimulus measures would be a stronger lever to pull, but the authorities are reluctant to do so.”

The PBOC will also cut interest rates on new loans and rediscounts by 25 basis points for the rural sector and small businesses starting Jan. 25, Mr. Gongsheng said.

MORE MEASURES ARE NEEDED

Analysts say more stimulus is needed this year to boost growth, fight deflation risks and curb unemployment.

“Employment pressure will not ease in 2024, and more efforts are needed to stabilize China’s labor market,” Yun Donglai, deputy director of the Ministry of Human Resources’ Employment Promotion Department, said at a press conference on Wednesday.

More emphasis will be placed on the government’s priority goals, such as strengthening support for college graduates and expanding job opportunities for them, Yun Donglai said.

“A more proactive consumption-focused fiscal policy is more effective. Allocating fiscal resources to consumption rather than investment is crucial as China faces deflationary pressure,” adds Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“China needs stronger domestic demand rather than more production capacity.”

The economic support introduced so far has had only a modest impact, increasing pressure on the authorities to adopt more stimulus measures.

But the central bank faces a dilemma: more credit is being allocated to productive forces rather than consumption, which analysts say could intensify deflationary pressures and reduce the effectiveness of its monetary policy tools, while pressures on the yuan continued to limit the extent of monetary easing. (Reporting by Kevin Yao, Ellen Zhang, Liangping Gao and Samuel Shen; French version by Corentin Chappron, editing by Blandine Hénault)

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