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China's central bank announces stimulus to stave off lunar liquidity hole

By Lawrence Gash

The People’s Bank of China frees up $115bn in liquidity to avoid a cash crisis in the run-up to the Lunar New Year

The Chinese central bank has announced an injection of monetary stimulus into world’s second largest economy.

The People's Bank of China (PBoC) announced that from January 6 it will lower the required reserve ration (RRR) for Chinese lenders in a bid to shore up its flagging economy.

By reducing the amount of money banks are required to have on hand, the PBoC freed up about 800bn yuan ($115bn, £87bn) in liquidity. The 50-basis points cut, bringing the level for larger banks down to 12.5 per cent, will return the blended reserve ratio for Chinese banks to its lowest since October 2007.

The decision was probably taken as the country faced a potentially destabilising $400bn liquidity hole as the Lunar New Year approaches. During this period companies and individuals often require larger-than-usual amounts of cash to clear debts, pay bonuses and cover celebration expenses.

The announcement caused Hong Kong and Shanghai markets to jump 1.25 per cent and 1.15 per cent respectively, with the region’s benchmark stock gauge rising 0.3 per cent having closed flat in the previous session. European stocks also rallied on the news.

Further Reading: Federal Reserve plans cash injection to avoid Christmas cash crisis

Further Reading: China says factory activity grew in December

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