China cuts banks' reserve requirement ratio and signals more tools are on the way to allay fears

However, analysts expect further supportive measures to follow.

We will create a good monetary and financial environment for the functioning of financial markets, including capital markets, Pan Gongsheng

The 50 basis point cut in the reserve requirement ratio (RRR) is expected to inject 1 trillion yuan ($140 billion) worth of liquidity into the market, central bank Governor Pan Gongsheng said at a news conference in Beijing on Wednesday.

“The People's Bank of China will strengthen the countercyclical and intercyclical adjustment of monetary policy tools, strive to stabilize market and confidence, and consolidate and strengthen the positive economic recovery,” Pan said.

“We will create a good monetary and financial environment for the functioning of financial markets, including capital markets.”

Pan said China still has enough policy space, with the country's average RRR at 7.4 percent meaning it has more room to maneuver compared to developed countries. He added that the RRR will remain an effective tool for medium and long-term interbank liquidity.

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A U-turn by the U.S. Federal Reserve, with the market expecting interest rate cuts this year, would also free Beijing's hands, he added.

Dwindling market confidence has led to increasing doubts about Beijing's ability to deliver a solid economic recovery this year. It also threatens President Xi Jinping's ambitions to build China into a financial superpower.

On Wednesday, China's state-backed newspapers doubled down on calls for financial security and quality development.

Finance is the bloodline of the national economy and an important part of the country's core competitiveness, People's Daily

“Finance is the bloodline of the national economy and an important part of the country's competitiveness,” People's Daily, a mouthpiece of the ruling Communist Party, wrote in a cover story.

The article made no mention of bailouts, but repeatedly cited Xi's directive to provide more financial support for the real economy, technological innovation and financial security.

The state business newspaper Economic Daily also called financial stability the basis for high-quality economic development.

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“Economy is the body and finance is the blood. The two coexist and thrive together,” the comment said Wednesday.

Earlier this week, Beijing has taken steps to improve market sentiment, with Premier Li Qiang pledging increased support for capital markets at a State Council meeting on Monday.

The China Securities Regulatory Commission said on Tuesday it would include more long-term institutional investors and avoid issuing guidelines that could dampen market expectations.

Goldman Sachs estimates that global investment and hedge funds hold around $1.075 trillion in Chinese stocks.

If consumption and the real estate market are weaker than expected after the Lunar New Year, interest rate cuts could occur. Gary Ng, Natixis

That total represents a historically low 6.2 percent of its holdings, down from 10 percent last year and 15 percent in 2021, chief China equity strategies analyst Liu Jinjin said in Hong Kong on Tuesday.

His decision not to cut interest rates earlier this month as market sentiment deteriorated sparked market speculation about Beijing's policy intentions.

“The [RRR] This step is helpful, but further action is needed to restore confidence, which may require fine-tuning the regulatory environment beyond traditional fiscal and monetary stimulus,” said Gary Ng, senior economist for Asia-Pacific thematic research at Natixis.

“If consumption and the housing market are weaker than expected after the Lunar New Year, we could see interest rate cuts.”

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the measures were aimed more at stabilizing confidence in the capital market, but would also benefit the real economy.

The central bank could adopt a looser monetary policy, with the option to cut its key lending rate – a benchmark for China's mortgage rate – next month and then cut the key rate of its medium-term lending facility, he added.

Hong Kong's Hang Seng Index extended its rise to about 4 percent from 2 percent after Pan announced cuts in the reserve requirement ratio. On Wednesday it finally closed with a plus of 3.56 percent.

Meanwhile, the benchmark Shanghai Composite Index closed up 1.8 percent on Wednesday.

Additional reporting by Amanda Lee