China is injecting $150 billion into the economy — that may fuel a short-term rally, UBS says

China’s move to cut the amount of funds banks need to hold in reserve could boost market sentiment — and that could be good news for stocks in certain sectors, according to investment bank UBS. The People’s Bank of China said Friday it would cut the reserve requirement ratio (RRR) by 50 basis points for all banks, effective from July 15. The move is expected to release around 1 trillion yuan (or $154 billion) in long-term liquidity into the economy. The reserve requirement represents the amount of money that banks must hold in their coffers as a proportion of their total deposits. A lowering of that required amount will increase the supply of money that banks can lend to businesses and individuals.

In the short term, the move could boost liquidity-sensitive sectors, such as aerospace and defense, electronics, IT and media, according to UBS. Companies with strong earnings expectations could also outperform, UBS said, citing sectors such as electric vehicles and batteries, and the new energy sector. However, the market rally may be short-lived given concerns over China’s slowing economic growth, the bank indicated.

UBS analysts pointed out that investors’ are worried about the weakening pace of China’s economic recovery in the second and third quarter this year — and that may weigh on the banking, insurance and consumer sectors. The Chinese central bank’s move on Friday signals that the country acknowledges the risks to China’s growth, analysts said.

China is injecting $150 billion into the economy — that may fuel a short-term rally, UBS says, CNBC, Jul 13