Bank Of China Enacts Stimulus

Bank Of China Enacts Stimulus

The People’s Bank of China has become the latest central bank to enact a monetary stimulus policy, driving a significant jump in futures trading.

Bank Of China Enacts Stimulus
Bank Of China Enacts Stimulus

The Bank of China boosted liquidity as a means of tempering capital outflows and fighting against low factory output. The move indicates China’s economic trouble may be increasing.

Specifically, the bank reduced the amount of cash banks must set aside as reserves. The required reserve ratio will decline by 50 basis points to 19.5% on Thursday. Futures on the FTSE China A50 Index gained 5.3% on Wednesday evening in China and contracts on the Hang Seng China Enterprises Index advanced 3.1%. The US markets are going to factor this into their activity today.

China frees up lending money to stimulate slow economy
Following China’s lowest reported annual growth rate in 25 years, the central bank effectively freed up over $100 billion – and more stimulus measures may be soon to come, reported The Wall Street Journal. Once central bank official believed the move is a precursor to an easing cycle.

What remains to be seen is how the Chinese market will react to the move. Consumer and businesses may capitalize on the stimulus measures, but they could also remain fiscally conservative until growth picks up.

“We don’t have any plan to expand our business and definitely not going to borrow from banks,” Guo Liyan, owner of Jiangyin Heyuan Textile Co., told the WSJ at the end of 2014. “Business is not as good as before, though unlike my neighboring companies we are still alive. We’re better off keeping things like they are now.”

The People’s Bank of China is not an independent entity and may come under more pressure to increase stimulus. One economist anticipates four more reserve ratio cuts in 2015 as deflation raises concerns.

Investors should keep their eye on the Chinese central bank’s policies in the coming months. As the world’s second-largest economy, China is likely to have a far-reaching influence on a variety of markets.

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