The People's Bank of China (PBOC) on Wednesday announced a series of monetary policy adjustments aimed at enhancing liquidity and promoting economic growth in the country.

One of the key measures taken by the PBOC is a reduction in the reserve requirement ratio (RRR). The RRR is the amount of cash that banks are required to hold as reserves. The PBOC will lower the RRR by 0.5 percentage point, effective from February 5, 2024. This move will inject 1 trillion yuan ($139.45 billion) into the market, thereby increasing liquidity.

In addition to the reduction in the RRR, the PBOC will also cut the re-lending and rediscount rates by 0.25 percentage point, from 2 percent to 1.75 percent, starting from January 25, 2024. This reduction is expected to decrease the overall cost of social financing, further facilitating economic recovery.

The announcement of these policy adjustments has had a positive impact on the Chinese stock market. Following the news, the Shanghai Composite Index climbed by 1.80 percent, while the Shenzhen Component Index and the ChiNext Index increased by one percent and 0.51 percent, respectively.

Bruce Pang, chief economist and head of Research at JLL Greater China, highlighted the PBOC's commitment to a stable and precise monetary policy. The focus is on reducing funding costs for financial institutions, ensuring consistent liquidity in the banking system, and supporting credit allocation to the real economy.

PBOC Governor Pan Gongsheng reassured that China's financial risks are manageable, with financial institutions and markets operating stably amid global economic challenges.

The PBOC plans to enhance its financial risk monitoring and assessment capabilities. It aims to establish a financial risk resolution mechanism that balances authority and responsibility. This initiative reflects the PBOC's commitment to managing financial risks and maintaining stability in the face of global economic challenges.

Looking ahead, the PBOC intends to utilize various monetary policy tools to maintain adequate liquidity. The goal is to align social financing and money supply with economic growth and price level targets. The PBOC also aims to improve financial services for the real economy, particularly in supporting private and small businesses.

Zhu Hexin, deputy governor of the PBOC and head of the State Administration of Foreign Exchange, predicts that the stability of China's cross-border capital flows will further improve in 2024. The current account is expected to maintain a reasonable surplus, with an increase in foreign capital inflows under the capital account.

The recent monetary policy adjustments by the PBOC reflect China's proactive approach to navigating its economic trajectory amid global uncertainties. By reducing the RRR and cutting re-lending and re-discount rates, the PBOC aims to enhance liquidity, support economic growth, and ensure stability in the banking system.