Markets Surprised by China's Central Bank Easing Decision

China’s economy has been under pressure for quite some time now, pushing the Central Bank to intervene.

China’s Central Bank is trying to help the economy, without creating any further problems – a move witnessed yesterday.

A surprise easing has left the markets in a state of shock, which was mainly aimed at putting a floor under the struggling economy.

People’s Bank of China has slashed a key lending rate to a record low, while also reducing the amount of money banks are required to keep in reserve.

These measures are seen as a move from the central bank to support the economy, while still being cautious.

The central bank’s scope for action remains restricted by risk that a bolder approach could potentially weaken the currency, increase debt, and use up all their options too quickly.

What the bank is trying to do is keep measures in reserve, just in case things get worse later on…

“The pattern of surprise PBOC policy announcements is likely intended to gain more attention and shift sentiment, thus getting more bang for the buck,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “We see a rising chance that PBOC will seek to surprise the market again.”

 

So far, their plan hasn’t had a lasting effect on the markets.

• After the lending rate cut, the CSI 300 Index – a key stock market indicator – only rose by 0.2%.
   
• Similarly, initial gains following the RRR (reserve requirement ratio) reduction evaporated over the next few days as investors remained concerned about economic risks.
   
• The yuan has been stable in a range of 7.1 and 7.2 this year.
   
• Government bond yields have dropped on bets for more easing in China.

The latest moves and recent efforts to stabilise the $7 trillion stock market rout represent a greater initiative by Pan and other government leaders to boost market confidence. However, some investors say stronger policies to address the economy’s growth challenges are most likely to be needed to have a lasting impact.

Unlike other central banks worldwide, the People’s Bank of China (PBOC) does not operate independently. Instead, it answers to China’s cabinet – known as the State Council. This setup limits Pan and the central bank’s freedom to act.

Heavily depending on unexpected moves to influence policy effectiveness could make things less transparent. This, in turn, might weaken efforts made by Yi Gang, Pan’s predecessor, to create a clearer policy structure and maintain regular communication with the market.