By admin 
The Chinese government is taking proactive steps to boost consumer spending, and is working to ensure a rise in share prices. According to Kavan Choksi this directed pensions and mutual funds to invest more heavily in domestic stocks, in order to stimulate economic activity. The Central Bank of China has also pumped a record amount of short-term funds into the financial system recently. This was done to pre-empt the cash crunch that typically accompanies the lunar new year holiday.
Kavan Choksi talks about China’s move of pumping short-term funds into the economy ahead of lunar new year
The People’s Bank of China pumped a near-historic amount of short-term funds into its financial system recently. This helped dial up liquidity support amid a cash squeeze with the looming new year holiday. The central bank of China injected a net 958.4 billion yuan ($131 billion) of cash via seven-day reverse repurchase agreements in daily open market operations. This was done at a time when millions of people across the country prepare to settle tax bills, travel home and hand out cash-filled red envelopes. It is not uncommon to see such fund injections during the holiday period. However, the size of the injection this time has significantly damped expectations of an imminent cut to the reserve requirement ratio of the People’s Bank of China. This is the level of funds that banks must hold in reserve.
In recent months, the People’s Bank of China has mentioned that it shall ratio “at an appropriate time” as part of efforts to revive confidence in the economy. It even changed its monetary policy stance. As China’s central bank tries to spur growth, its policy stance went from “prudent” to “moderately loose”. A cut in the reserve requirement ratio would widely be considered as a major easing move that is aimed at boosting long-term credit. The PBoC or People’s Bank of China had also front-loaded a significant amount of the medium-term liquidity into the market in December.
The intricate balancing act of China’s central bank is reflected in its delay in cutting the reserve requirement ratio or RRR. The PBoC is keen to reserve the use of its tools for what it expects to be a challenging year, at least economically.
Taking into account the significant impact an RRR cut would signal and the limited room for the PBoC to reduce it further, the central bank is likely to “save some ammunition for the signalling effect in the future”. The average reserve requirement ratio at Chinese banks stands at 6.6 %.
As per Kavan Choksi, the PBoC is likely to depend more on open market operations in 2025 for managing liquidity, instead of cuts to the RRR or benchmark policy rate. Major headline moves on the RRR and interest rates are reserved for a more suitable time. Beijing is focusing on reflating the world’s second-largest economy, while also avoiding further renminbi weakness. Since December 2024, the PBoC has set a strong daily reference rate for the renminbi, stopped buying government bonds and issued offshore bills. This indicates that the central bank is prioritizing currency stability over other pro-growth targets.