BEIJING (Reuters) – China’s central bank will reduce the amount of bank reserve requirements from Feb. 5, the first such move in 2024, as policymakers continue efforts to support the economy.

People’s Bank of China (PBOC) Governor Pan Gongsheng said at a news conference in Beijing on Wednesday that the bank would cut the reserve requirement ratio (RRR) for all banks by 50 basis points, adding that this measure would free up 1,000 billion yuan (128.42 billion euros).

This drop in RRR, the largest since December 2021, exceeds the expectations of most analysts, while two cuts of 25 bp were decided in March and September 2023.

“The reduction in the RRR is a sign that the BPC will remain accommodative throughout this year, even though it did not lower the rate of the medium-term loan facility (MLF) earlier, as the markets “were waiting for it,” said Xu Tianchen, economist at the Economist Intelligence Unit.

“Politicians also want to ensure that the economy gets off to a good start by concentrating political support at the start of the period, which will be necessary to achieve the government’s ambitious growth targets.”

The BPC press conference was unusual, as the central bank tends to announce such decisions through the publication of statements on its website, outside of market opening hours.

“The challenges are still there and the banking system is still struggling,” said Tim Graf, head of EMEA macro strategy at State Street.

“This is not totally unexpected and will not be much of a game-changer. More targeted stimulus measures would be a more powerful lever to pull, but the authorities seem reluctant to do so.”

The PBOC will also cut new loan and rediscount interest rates by 25 basis points for the rural sector and small businesses from January 25, Pan Gongsheng said.

MORE MEASURES ARE NEEDED

Analysts say more stimulus is needed this year to boost growth, combat deflation risks and contain unemployment.

“Employment pressure will not decrease in 2024, and more efforts are needed to stabilize China’s labor market,” said Yun Donglai, deputy director of the Employment Promotion Department at the Ministry of Human Resources. during a press conference on Wednesday.

Greater emphasis will be placed on the government’s priority goals, such as strengthening support for higher education graduates and expanding employment opportunities for them, Yun Donglai said.

“A more proactive fiscal policy focused on consumption is more effective. Allocating fiscal resources to consumption rather than investment is essential, as China faces deflationary pressure,” adds Zhiwei Zhang, economist in head at Pinpoint Asset Management.

“China needs stronger domestic demand rather than more production capacity.”

The support put in place for the economy so far has had only a modest impact, increasing pressure on authorities to take more stimulus measures.

However, the central bank faces a dilemma: more credits are allocated to productive forces rather than consumption, which could accentuate deflationary pressures and reduce the effectiveness of its monetary policy tools, according to analysts. while pressures on the yuan continued to limit the scope of monetary easing.

(Reporting by Kevin Yao, Ellen Zhang, Liangping Gao and Samuel Shen; Corentin Chappron, edited by Blandine Hénault)

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