Short-term market push as China injects $150 billion into the economy

Analysts say China’s lowering of the reserve requirement ratio for banks could boost market sentiment and stocks in some sectors will benefit.

Central Bank of China (PBoC) Headquarters

There are winners and losers

China’s central bank (PoBC) late last week said it would cut the reserve requirement ratio (RRR) by 50 basis points for all banks. This decision will take effect from July 15. The move is expected to “free up” about 1 trillion yuan ($154 billion) of long-term liquidity for the world’s second-largest economy.

Required reserves represent the amount of money that banks must hold at a certain percentage of total deposits. A reduction in the reserve requirement ratio will increase the money supply that banks can lend to businesses and individuals.

“We think this large-scale reduction of the reserve requirement ratio can boost market sentiment in the short term and improve stock market liquidity,” said Lei Meng and Eric Lin, two UBS analyst said.

In the short term, China’s move to cut the reserve requirement ratio will benefit “liquidity-sensitive” sectors, such as aerospace and defense, electronics, and information technology. and media.

In addition, UBS experts also predict that companies with strong profit forecasts may also outperform, such as those operating in the electric vehicle, battery, and new energy sectors.

However, a market rally could be short-lived due to concerns about China’s slowing economic growth, UBS experts warn.

“Reducing the reserve requirement ratio to some extent has added to concerns among stock investors that the economic recovery in the second and third quarters of 2021 may not be as good as the market. expected”, UBS experts commented.

“In our view, in the absence of a shift to monetary policy easing, additional liquidity (through the release of about 1 trillion yuan) will not be able to spur a sustained market recovery.” steady”.

As observed by UBS, investors are worried about the speed of China’s economic recovery in the second and third quarters of 2021. weaken and this weighs heavily on the banking, insurance, and consumer sectors.

Alleviate the impact on corporate profits

Furthermore, analysts believe that the central bank’s move to lower the reserve requirement ratio over the weekend also signaled that the country had anticipated the risks to growth.

“It’s a signal, a message that the authorities are paying attention and alert to the possibility of recession risks,” said Andrew Tilton, chief economist for Asia-Pacific at Goldman Sachs commented.

“This move (China lowers reserve requirement ratio) is estimated to inject 1 trillion yuan into the economy, which is a perception of the negative effects,” said analysts at Eurasia Group. to corporate profitability, financial stability and growth”.

On the other hand, Vishnu Varathan, Head of Economic and Strategy Department at Mizuho Bank, assessed that the recent move did not overshadow the prudent monetary policy of the Central Bank of China, which is based on the strong hand easing.

Mr. Varathan China is focusing on credit adjustments to limit credit flowing to bubble or speculative sectors, while strengthening credit to small and medium-sized enterprises, said China. According to this expert, the foundation of Beijing’s policy calculations remains to minimize the accumulation of financial risks.