Over the weekend, the People’s Bank of China has reduced the reserve requirement ratio for commercial banks. The move is aiming to easy credit conditions in the country and reduce the drag on the country’s economy, which has been hit by a slowdown in recent months.
With the 100 basis points cut, the reserve requirement ratio for Chinese commercial banks has come down to 18.5%. The ratio represents the portion of the deposits which banks must maintain with the PBOC. These funds are parked with the central bank and are not available for making new loans.
The move was a surprise decision with the majority of market participants expecting only a 50 basis points cut to 19%. Weaker growth trajectory coupled with no inflation pressures has prompted authorities to look for new ways to stimulate the Chinese economy.
As a result the Chinese stock market has been running extremely hot for the past six months, effectively expecting more stimulus. From November 2014, this is the fourth easing move by the central bank. The PBOC has cut interest rates and reserve requirement ratios twice.
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The Chinese stock market marked the announcement with a knee jerk reaction which was only followed by a selloff as the PBOC action did not prevent a stock market drop of 1.64% on Monday.
PBOC stimulus has had relatively little impact in terms of preventing the slowdown in China
Many experts have expressed opinions that the move might not be enough to boost Chinese growth.
Analysts at the Bank of Tokyo-Mitsubishi UFJ said, “So far PBOC stimulus has had relatively little impact in terms of preventing the slowdown in China. We think there is more pressure on Aussie to come.”
A note by private investment bank CIMB, which is focused on the South-East Asian Market highlights, “A short-lived euphoria for Asian currencies on the back of the PBOC move may provide some decent levels to buy dollars on the cheap.”