People’s Bank of China eases the reserve requirement ratio by 50 basis points, stocks rally

There is optimism sweeping across Asian markets following a statement by the People's Bank of China, (PBOC). The macro-communication issued at a rare briefing was comprehensive - a package of policy-easing measures aimed at soothing an ailing economy as detailed in a report by CNBC.

The People’s Bank of China announced it will reduce the reserve requirement ratio by 50 basis points, among other measures. A move in this direction is considered quite crucial for restoring some momentum in solving the ongoing economic challenges to regain confidence in investors.

The latest measures by PBOC include the slashing of interest rates and adjustment of reserve requirements for banks that aim at providing liquidity to the financial system to inspire more lending, particularly in strategic sectors battered by recent economic challenges. Analysts said these are crucial to get domestic demand kicking off well and sustain growth in light of the global economic uncertainties.

Further, it also announced it would cut the seven-day reverse repurchase rate from 1.7 per cent to 1.5 per cent. Pan Gongsheng, governor of the People’s Bank of China, also said that authorities could cut the loan prime rate by 0.2 to 0.25 percentage points, without specifying whether he was referring to the one-year or five-year. The one-year LPR currently stands at 3.35 per cent and five-year LPR is at 3.85 per cent, other measures also include reducing down payments for second homes, as well as 1 trillion yuan ($141.78 billion) of long-term funds.

In addition to cuts in interest rates, the PBOC also showed its commitment to currency stability. This is very important because the Chinese yuan has lately been under pressure due to external factors such as tensions on trade and the economy as well as geopolitical ones. The stable currency environment that would be created by the PBOC is seen to promote both domestic and foreign investments in the country.

Market reaction and prognosis

The immediate market reaction has been positive with significant gains on major Chinese indices. Even within the time frame of a few hours, the Shanghai Composite Index shot up by more than 2 per cent as investors reflected in this sky-high market. It is not just the case with mainland markets; the Hang Seng Index in Hong Kong also witnessed notable gains.

These measures hence are in the right direction but it is yet to be seen how soon these ripple-down effects will take place in the bottom line of the economy. Manufacturing and real estate sectors have been under pressure because of the regulatory crackdown and softening consumer demand so the PBOC's moves are expected to offer much-needed comfort.

Long-term consequences

Still, ahead of the curve, analysts are cautiously optimistic about the long-run effects of such policies. With such proactive steps from the PBOC, there might be a sign that it will get along with more accommodative monetary policy in response to persistent economic challenges. On the other hand, there are inflationary pressure concerns from increased liquidity in the market.

With the stimulus balance in between growth and price stability being a hurdle, it is mainly through these factors that investor confidence can be sustained for the remainder of the month. Global economic conditions led by the easing US interest rates along with the ongoing war between Russia and Ukraine are all going to have deep implications for future policy actions by central banks. Investors and market participants will follow these developments along with the decisions of the banks quite carefully to gain insights into future market movements.