USD/CNY fell by 0.21%, and reached its lowest level since January 11 after the Central Bank of China announced that from February 5 it would reduce the amount of cash that banks must keep as reserves.
The reserve requirement ratio (RRR) for all banks will be reduced by 50 basis points, which would free up 1 trillion yuan to the market. This is the largest such reduction since December 2021 and it follows earlier cuts of 25 bps for all banks in March and September last year.
Experts said that the latest measures are aimed at supporting the fragile economic recovery in the face of falling stock markets (earlier this week, the blue chip CSI300 Index plunged to near five-year lows). Overall, the decrease in the RRR is a sign that the Central Bank will maintain a soft monetary policy during this year. However, analysts warn that in 2024, more stimulus measures may be required from the government to prevent deflationary risks and curb the growth of unemployment. So far, a slew of policy measures have proven only modestly beneficial, raising pressure on authorities to roll out more stimulus. In 2023, China's GDP grew by 5.2%, meeting the official target, but the recovery has been more shakier than investors had expected.
"A more active consumption-oriented budget position is more important and effective. Allocating budget resources to consumption rather than investment is crucial in the face of deflationary pressures. China needs stronger domestic demand, not increased production capacity," Pinpoint Asset Management economists said.