China's Central Bank Expected to Cut Reserve Requirements in Q1

Forex - The Chinese central bank injected a large amount of liquidity into the market without using high-profile incentives by the end of 2024. The People’s Bank of China had previously indicated that it could further release more cash for banks by lowering the reserve requirement ratio once again by the end of 2024. Now, it is expected that this move will be made in the first quarter of this year, allowing authorities to maintain their ammunition on a closely watched tool that could alleviate the negative effects of new U.S. tariffs.

To ensure the market has sufficient liquidity, PBOC instead injected 1.7 trillion yuan (233 billion dollars) in cash directly to banks last month through reverse repos and government bond purchases. This operation surpassed the largest monthly amount of annual credit provided so far through the medium-term lending facility, which had previously been the PBOC's key tool for liquidity injections and is now nearing retirement.

The Chinese economy has shown signs of recovery following a broad stimulus package offered by authorities since the end of September, but the growth outlook remains challenging due to the potential for a second trade war with the U.S. Senior leaders have signaled that they will adopt a more supportive stance on liquidity in 2025 to ensure banks have enough money to lend to the economy. An increase in government bond sales in the coming years will also require sufficient cash in the market to absorb the bonds.