China cuts banks’ reserve requirement to spur growth

The news: China’s central bank announced a deep cut to bank reserves late on Wednesday in a move to signal support for a fragile economy and plunging stock markets.

The numbers: The People's Bank of China (PBOC) will make a 50-basis points (bps) cut in the amount of cash banks must hold as reserves, effective from 5 February. The decision will inject about 1 trillion yuan ($220 billion) of cash into the banking system, exceeding most analysts' expectations. The cut in reserves follows earlier cuts of 25 bps for all banks in March and September last year.

The context: The biggest cut in banks' reserve requirement ratio (RRR) in two years comes as the world's second-largest economy struggles to mount a strong post-COVID recovery amid a housing crisis, local government debt risks and weakening global demand. It also comes just days after China's benchmark stock indexes hit 5-year lows amid relentless selling by foreign investors. Analysts said more stimulus is needed this year as the government aims to spur growth to fend off deflationary risks and keep a lid on unemployment.

What they said: "It's a welcome step, but it's not going to be a game-changer," Chris Scicluna, head of economic research at Daiwa Capital Markets in London told Reuters.