China cuts bank minimum reserves by 0.5%

China’s central banks has cut the amount of cash required by banks to hold in reserve. They hope to increase the lending to businesses and households as they try to steer an economy that is still recovering.

Pan Gongsheng (Governor of the People’s Bank of China, PBOC) announced on Wednesday that reserve requirements ratio will be reduced by 0.5% starting 5 February. This is the largest reduction in the rate since 2021. This will release about 1tn Yuan (£110.8bn), in the form new loans.

Economists expected a rate reduction later this year. The surprise announcement came at a time when the Chinese authorities were trying to stabilize the stock markets that had been in a downward spiral, and which have given China’s economy a shaky beginning to 2024. The Hang Seng index rose 3.6% after Pan’s announcement on Wednesday, its best performance in months.

Authorities are said to be considering a more aggressive stimulus package that could be announced in the coming week and would be worth around 2tn Yuan.

The government’s statements indicate that Beijing is likely to continue with its cautious approach rather than injecting massive stimulus, which economists believe is needed to restart the economy. The PBOC stated on Wednesday that it was implementing “prudent monetary policy” by reducing the reserve rate. Li Qiang , China’s premier , stated that China “did not seek short-term economic growth” last week. China’s premier, Li Qiang, said last week that the country “did not seek short-term growth”.

Samy Chaar is the chief economist of wealth management company Lombard Odier. He told Reuters that the plan “puts a floor beneath Chinese growth and allows for some stability.” Chaar said, “But we’re still far away from any type of decisive policy interventions to change the direction of the economy of the country.”

Property sector accounts for between 25 and 30 percent of China’s GDP. This is largely responsible for the wealth of Chinese households and consumer demand. In the wake of the Covid-19 pandemic, and a regulatory storm that swept through China in 2020, many major property developers such as Evergrande or Country Garden were crippled. Homebuyers were left without the apartments they invested their savings in after hundreds of development projects were abandoned.

This has eroded the confidence in the economy, and it is difficult to reverse despite recent efforts to support the property sector. The housing ministry and financial regulator announced plans this month for a new system that would accelerate loan approvals for developers.

The demand for new houses remains low. In 2023, the value of home sales in the top 100 real estate companies fell by 16.5%. This was followed by a 34.6% drop year-over-year in December.

China’s leaders will likely set a 5% GDP growth goal at the National People’s Congress in March, which is a parliamentary gathering that occurs every year. Official statistics show that the economy grew by 5.2% between 2023 and 2024, but some economists think it was actually lower.