- The People’s Bank of China (PBoC) has significantly lowered its benchmark interest rate and reserve requirement, a dual cut unprecedented since 2015.
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These policy changes aim to stabilize the struggling Chinese stock market and could impact Bitcoin and global asset markets.
In a decisive move following the U.S. Federal Reserve’s rate cut, the People’s Bank of China (PBoC) has announced a reduction in its key lending rate from 1.7% to 1.5%, a double of the usual decrement. This latest adjustment on September 25, 2024, is part of a broader monetary easing strategy aimed at reviving economic growth and stability in the face of global financial pressures.
Monetary Easing: A Tool for Economic Stability
The PBoC has not only reduced the lending rate but has also lowered the required reserve ratio to its lowest level since 2018. This dual adjustment, which last occurred simultaneously in 2015, allows banks to increase lending by reducing the amount of cash they must hold in reserve. This significant shift in policy is intended to inject more liquidity into the economy, which can lead to increased spending and investment.
The impact was immediately visible as the yield on 10-year Chinese government bonds fell to a historic low of 2%, reflecting increased confidence and lower borrowing costs compared to higher rates in the U.S. and Europe.
The easing of monetary policy by China is poised to facilitate the issuance of long-term government bonds valued at a minimum of 10 trillion yuan ($1.42 trillion), a substantial move when compared to the government’s annual budget of $4 trillion. This strategy, outlined by Liu Shijin, former deputy director of the Development Research Center of the State Council, aims to fund projects over the next two years, capitalizing on the near-absence of inflation in the country for over a year.
Stock Market Response and Long-term Prospects
Following these monetary policy announcements, there has been a notable improvement in the Chinese stock market, which had previously suffered significant losses totaling $6 trillion over nearly four years due to concerns over Western sanctions and domestic real estate crises. Unlike the 2008 American financial crisis, which was deeply intertwined with real estate and personal bankruptcies, China’s current financial issues are more contained within the real estate development sector, sparing the broader banking system from systemic shock.
The Shanghai Stock Exchange and other indices have shown varied performance, with the Shanghai Composite Index experiencing a modest decline this year, while other indices like Hang Seng and Shenzhen Component have seen more dramatic fluctuations. However, the market has started to recover, aided by increased purchases by investment funds and insurance companies using PBoC funds to buy stocks, thus bolstering market valuations.
Moreover, the loosening of monetary policies may augur well for Bitcoin and other asset classes, despite the regulatory challenges within China regarding cryptocurrency transactions. The speculative nature of Bitcoin and its perceived advantages over traditional assets like gold may draw more attention, particularly as China continues to liberalize its financial markets. However, the ongoing geopolitical tensions and economic uncertainties call for cautious optimism.