Constrained on all sides, China’s central bank is aiming to squeeze more value out of its policy actions by catching markets unaware with surprise easing aimed at putting a floor under the struggling economy.

A record cut to a key lending rate earlier this week announced by the People’s Bank of China was just the latest unexpected move since Governor Pan Gongsheng took office last summer. At a press briefing last month, he shocked with an outsized cut to banks’ reserve requirement ratio.

The moves reflect the PBOC’s effort to step up support without abandoning its restrained approach to stimulus. The central bank’s scope for action remains restricted by risk that a bolder approach would weaken the currency, spur another build-up in debt and burn through policy room that’ll be needed later on if the longest streak of deflation since the 1990s and prolonged property downturn worsen.

“The pattern of surprise PBOC policy announcements is likely intended to gain more attention and shift sentiment, thus getting more bang for the buck,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “We see a rising chance that PBOC will seek to surprise the market again.”

So far, the strategy has yet to have a sustained impact on markets.

The onshore benchmark CSI 300 Index gained just 0.2% on the day of the lending rate cut, while initial gains following the RRR reduction evaporated over the next few days as investors remained concerned over economic risks. The yuan has been stable in a range between 7.1 and 7.2 this year. Government bond yields have dropped on bets for more easing in China.

“Stronger policy action to support the underlying economy may still be required to lift overall sentiment,” said Sonija Li, an analyst at MIB Securities Hong Kong Ltd.

The latest moves and recent efforts to stabilize the $7 trillion stock market rout represent a greater resolve by Pan and other government leaders to boost market confidence. Yet some investors say stronger policies to address the economy’s growth challenges are needed for them to have a lasting impact.

“Pan seems willing to take slightly larger steps when shifting policy than his predecessor did,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research. But the PBOC “will remain a cautious institution,” Wolfe said, adding that he doesn’t expect any sharp changes in policy this year.

The PBOC answers to the State Council, China’s cabinet, and isn’t an independent central bank like many of its global peers. That’s another restraint on Pan and the central bank’s room to maneuver.

There’s a risk that relying on surprises to boost policy effect could reduce transparency. That threatens to undermine efforts by Yi Gang, Pan’s predecessor, to establish a clearer policy framework and regular communication with the market.

“The more surprising these moves are, the less consistency there might be,” said Shen Meng, director at Chanson & Co, an investment bank in Beijing.

“China has more monetary stimulus in the pipeline...The surprisingly deep cut in the five-year loan prime rate Tuesday showed banks had room to lower borrowing costs. Our analysis - using term spreads in corporate bonds as a reference - shows they still have more space - as much as 20 basis points - even if the PBOC stands pat,” Chang Shu and David Qu, economists at Bloomberg Economics said.

Another risk is that when the PBOC falls short of market expectations, investors could take the negative surprise harder, according to He Wei, China economist at Gavekal Dragonomics. The PBOC’s decision to buck expectations and not cut interest rates in January, for example, hit investor sentiment hard, he said.

“Markets are happy when policy moves exceed expectations,” He said. “The problem is when you have disappointing moves and no real explanations for them, investors will tend to assume the worst.”

Bold policy moves over the past year:

• June 2023: The PBOC front-runs the reduction of its one-year policy loan rate by cutting short-term rates first
• August 2023: The central bank unexpectedly lowers that key policy rate by the most in three years
• December 2023: Policymakers inject a record amount of cash via its one-year loans, exceeding forecasts
• January 2024: Governor Pan announces an outsized RRR cut during a press conference
• February 2024: Chinese banks slash a key reference rate for mortgages by the most on record

  - Bloomberg