PBOC to implement third RRR cut for 2024, lifting Chinese shares

China's central bank pledged on Friday to implement the third cut to the reserve requirement ratio this year while kicking off the implementation of two policy tools directly supporting the capital market.

These moves, according to analysts, have reinforced policymakers' consistent and decisive commitment to providing reasonably ample liquidity to stabilize economic growth and shore up the capital market, sending Chinese equities surging on Friday.

Pan Gongsheng, governor of the People's Bank of China, the country's central bank, said the PBOC will further cut the RRR — the proportion of deposits banks must keep as reserves — by 0.25 to 0.5 percentage points at proper time based on market liquidity before the end of the year, after cutting it by 0.5 percentage points last month.

Pan said that the loan prime rate, the market-based lending benchmark to be released on Monday, is also expected to drop by 0.2 to 0.25 percentage points, after the central bank cut policy rate benchmarks last month while commercial banks announced to lower deposit rates on Friday.

"The economy still faces some prominent challenges, which are mainly related to the real estate market and the capital market. Drawing on international experience and China's practices in the past, we need to unveil targeted policies in response," Pan said.

Addressing the Annual Conference of Financial Street Forum 2024 in Beijing on Friday, Pan said the policies related to special central bank lending for share buyback and holding increase have been officially released on Friday for implementation.

The securities, funds and insurance companies swap facility (SFISF) — which enables financial institutions to pledge securities with the central bank for lending to invest in the capital market — is now open to financial institutions for application, Pan said.

The A-share market reacted positively to the moves, with the benchmark Shanghai Composite Index up 2.91 percent to close at 3,261.56 points. The ChiNext Index, China's NASDAQ-style board of growth enterprises, rose 7.95 percent while Shanghai's tech-heavy STAR 50 index jumped 11.33 percent.

Official data showed that 20 securities and fund companies have been approved to participate in the swap facility operation, and the first batch of applications has exceeded 200 billion yuan ($28.12 billion).

Pan added that the central bank does not provide fund support for the market directly via the SFISF and does not expand the central bank's money supply and base money while stressing the "red line" that credit funds must not enter the stock market in violation of financial regulation.