China’s biggest liquidity injection in three years not a game changer for BCA while HSBC fund sees muted impact

RRR cut is not a game changer for the economy as credit growth and investment, key drivers of business cycle, have yet to rebound decisively: BCA Research

Channel checks suggest Chinese banks have no aim to change their full-year credit plans at the end of 2021, Morgan Stanley says

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People walk on the street next to the large screen showing stock exchange data in Shanghai on November 19..Photo: EPA-EFE

Published: 10:16am, 8 Dec 2021Updated: 4:26pm, 8 Dec 2021

China is set to inject the biggest amount of liquidity into the system in more than three years from a cut in banks’ reserve ratio requirement (RRR). Stock investors may need to tread with caution as past market reactions have been mixed at best while the economy struggles.

The People’s Bank of China this week announced a 50-basis point cut reserve requirement ratio effective from December 15, the second this year after a July 9 move. The decision will free up 1.2 trillion yuan (US$188 billion) of capital for the economy, the most since a full percentage point reduction in October 2018 unleashed the same amount of cash.

The Hang Seng Index rose by 2.7 per cent from near a 15-month low a day after the cut, while the benchmark in Shanghai gained 0.2 per cent. Alibaba Group Holding, the owner of this newspaper, surged by a record 12 per cent after losing almost half of its market value over the past six months.

Not every RRR cut has generated the same level of optimism. China has now lowered the reserve ratio 11 times since April 2018, adding a cumulative 8.2 trillion yuan of financial liquidity, according to central bank data. The Hang Seng Index rose on seven of those occasions. HSBC Jintrust expects a muted impact from this month’s cut.

Premier Li Keqiang says China has many tools to stabilise economic growth. Photo: Reuters

“The RRR cut is within market expectations and the PBOC has refrained from expanding the base currency in recent years,” Shen Chao, a strategist at HSBC Jintrust Fund Management in Shanghai. “It does not represent a shift in monetary policy. We expect the impact to be neutral.”

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