China Tries to Stop Stock Market Plunge with $140 Billion

The escalation of the loss of value of Chinese stocks has lit up all the ‘warning lights’ in Beijing, judging by the rather unusual move by the People’s Bank of China, which decided to release significant liquidity into the market. According to agencies, the Chinese central bank announced on Wednesday that from February 5, the reserve requirement ratio for banks will be reduced by 50 basis points. This will free up more than one trillion yuan, or nearly $140 billion, for the banking sector, reports Reuters.

This is the largest reduction in the reserve requirement ratio since December 2021, and in its scope, it significantly exceeded analysts’ expectations. Recall that in March and September of last year, the reserve requirement ratio was cut by 25 basis points each time. The central bank added in its statement that there is room for further easing of monetary policy if necessary. By reducing the reserve requirement, banks are freed up additional capital for lending, which should ultimately increase personal consumption in the world’s second-largest economy.

Three Trillion Dollars Lost

The Chinese economy is still feeling a weak recovery from the negative economic consequences of the coronavirus pandemic, and there is also a years-long crisis in the real estate sector, which accounts for a quarter of the economy. The economy is also pressured by rising debts of local authorities and weakening foreign demand for Chinese goods. Data released last week showed that China’s GDP grew by 5.2 percent last year, in line with government expectations.

However, investors, especially foreign ones, believe that the Chinese economy needs additional monetary stimulus, which resulted in a 13 percent drop in the value of Chinese stocks last year. A longer-term view is even more catastrophic – in the last two years, the value of stocks on the Shanghai and Shenzhen exchanges has fallen by three trillion dollars. For illustration, the Japanese Nikkei and the American S&P 500 strengthened by a quarter last year. The trend of selling off Chinese stocks continued into 2024, with the CSI300 index falling to its lowest level in the last five years at the beginning of this week. Since its peak in February 2021, the CSI300 has plummeted by 47 percent.

However, with the announcement of the People’s Bank’s decision to lower the reserve requirement ratio, the Hong Kong stock exchange index HSI jumped by 3.6 percent, marking the largest daily increase in the last two months. Nevertheless, analysts believe that the Chinese economy will need more stimulus throughout this year if the government wants to curb deflationary pressures and keep the unemployment rate under control. Chinese companies are still reluctant to open new jobs.