The Chinese stock market roared to life on Tuesday, fueled by a surprise and substantial monetary stimulus package unveiled by the People’s Bank of China (PBoC). The central bank took decisive action, cutting both the reserve requirement ratio (RRR) for banks and the seven-day repo rate, just a day after lowering the 14-day reverse repo rate. This aggressive move signaled a clear shift in policy, demonstrating the Chinese government’s commitment to addressing the economic slowdown.
The PBoC’s governor, Pan Gongsheng, announced a significant 50-basis-point reduction in the RRR, dropping it from 10.0% to 9.5% for commercial banks. This injection of approximately 1 trillion yuan ($140 billion) into the banking system will provide banks with increased capital to lend. To further alleviate pressure on the struggling property market, Pan also announced a 0.5 percentage point cut in existing mortgage rates.
In addition to the RRR cut, the seven-day repo rate was slashed by 20 basis points to 1.5%, while the 14-day reverse repo rate, already lowered on Monday, saw a 10-basis-point reduction to 1.85%. These simultaneous cuts across various interest rates represent a significant departure from previous policy strategies and indicate the PBoC’s commitment to bolstering economic activity.
Market analysts were quick to praise the PBoC’s proactive stance. Xinquan Chen, an economist at Goldman Sachs, described the simultaneous cuts as “rare” and emphasized the “relatively large magnitude” of the reductions. He highlighted the significance of the guidance on another 25-50 basis point RRR cut by the end of the year, suggesting policymakers’ growing concerns over downside risks to the Chinese economy. However, Chen also cautioned that more fiscal stimulus will be needed to support domestic demand.
Goldman Sachs anticipates further easing measures, forecasting another 25-basis-point RRR cut in the fourth quarter of 2024, followed by two more cuts of the same magnitude in the first and third quarters of 2025. The bank also expects two 10-basis-point policy rate cuts in the second and fourth quarters of 2025.
ING Group, another prominent financial institution, noted that markets had initially anticipated smaller 10-basis-point cuts, making the 20-basis-point reduction a more aggressive move than expected. While they acknowledged the potential positive impact, they cautioned that the long-term implications would depend on the PBoC’s future actions. Lynn Song, ING’s China chief economist, emphasized the significance of the combined policy announcements, saying, “We feel today’s measures are a step in the right direction, especially as multiple policies were announced together rather than spaced out piecemeal. We continue to believe that there is room for further easing in the months ahead, as most global central banks are now on a rate-cut trajectory.”
The market responded positively to the PBoC’s stimulus measures. The Hang Seng Index surged 4.13% on Tuesday, closing at 19,000.56, its highest level since May. U.S.-listed ETFs investing in Chinese equities also rallied strongly in premarket trading. The iShares MSCI Hong Kong Index Fund EWH was up 2%. The Chinese yuan appreciated 0.3%, reaching its strongest levels since May.
Major U.S.-listed ETFs focused on China also surged ahead of the market open. The KraneShares CSI China Internet ETF KWEB jumped 5.6%, the iShares China Large-Cap ETF FXI climbed 5.4%, and the iShares MSCI China ETF MCHI rose 5.3%.
Chinese companies listed on U.S. exchanges also saw significant premarket gains. Chinese EV-maker Li Auto Inc. LI surged 8%, while NIO Inc. NIO gained 7%. JD.com Inc. JD rose 7.1%, and Alibaba Group Holdings Ltd BABA, China’s largest publicly traded company with a market capitalization of $209 billion, climbed 5.4%.
The PBoC’s aggressive monetary easing strategy has injected a much-needed dose of optimism into the Chinese stock market and sent a clear signal that the government is committed to supporting economic growth.
