Chinese Central Bank attempts to stimulate economy

peoples Bank of ChinaIn a move which some consider long over due, over the weaken, the People’s Bank of China announced a reduction in the reserve requirement ratio for commercial banks. The effort is intended to boost lending, in a bid to stimulate the economy by easing credit conditions.

The PBOC administered a 100 basis points cut of the reserve ratio for the Chinese commercial banks, putting it at 18.5%. This ratio represents the amount of deposits which banks have to keep with the Central bank. A reduction in this rate therefore makes available additional funds to the commercial banks, in order to give out as loans.

The majority expected a 50 basis point cut, but the Chinese Central Bank surprised with a 100 bp cut as China’s economic decline continues. Recent data shows growth at its weakest in many years with disappointing inflation pressures. An anticipation of more aggressive stimulus measures has been driving the Chinese stock market higher since last year.

Analysts at the Bank of Tokyo-Mitsubishi UFJ stated that; “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 reads: “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.”

The market reaction was a 1.64% sell-off in the stock market, and the Yuan also traded lower against the dollar.

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