In a decisive move to revitalize its struggling economy, China’s central bank announced a comprehensive suite of monetary stimulus and property market support measures on Tuesday. This initiative aims to address mounting deflationary pressures and stabilize the housing sector, following a series of disappointing economic data that raised concerns about meeting the government’s growth targets for the year.

The announcement by People’s Bank of China (PBOC) Governor Pan Gongsheng came during a press conference, where he was joined by National Financial Regulatory Administration Minister Li Yunze and China Securities Regulatory Commission (CSRC) Chairman Wu Qing. Their presentation prompted a surge in both stocks and bonds, signaling renewed investor optimism following the government’s intervention.

Key Measures Announced

Among the central measures outlined was a cut in the reserve requirement ratio (RRR) for banks by 50 basis points. This reduction is expected to release approximately 1 trillion yuan (about $142.21 billion) for new lending, which could help boost economic activity. Pan indicated that depending on the liquidity situation in the market later this year, further reductions of 0.25 to 0.5 percentage points could follow.

Additionally, the PBOC will lower the seven-day reverse repo rate by 0.2 percentage points, bringing it down to 1.5%. This adjustment is anticipated to influence the medium-term lending facility (MLF) rate by approximately 0.3 percentage points, with loan prime rates and deposit rates expected to decline by 0.2 to 0.25 percentage points. While Pan did not specify when these measures would take effect, the urgency behind the moves was clear, given the current economic climate.

To alleviate the financial burden on households, the central bank will also guide commercial banks to reduce existing mortgage interest rates by an average of 0.5 percentage points. Furthermore, the minimum down payment ratio for second-home buyers will be lowered from 25% to 15%, making it more accessible for individuals looking to enter the property market.

Reviving the Stock Market

Recognizing the challenges in the stock market, the CSRC announced that it would issue guidance to encourage medium and long-term funds to invest in the market. Measures to promote mergers, acquisitions, and reorganizations were also included in the initiative. The CSRC intends to bolster support for the Central Huijin Investment, a state fund involved in stock purchases, thereby expanding its investment scope.

To facilitate access to capital for stock purchases, the PBOC introduced two new tools. The first is a swap program, initially sized at 500 billion yuan, designed to ease access to funding for funds, insurers, and brokers seeking to buy stocks. The second tool offers up to 300 billion yuan in low-interest PBOC loans to commercial banks to support share purchases and buybacks.

Concerns and Future Outlook

Despite the broad-ranging measures, analysts expressed caution regarding the efficacy of these policies in generating real economic activity. Given the weak credit demand from businesses and consumers, there is a growing sentiment that further fiscal stimulus may be necessary to complement the central bank’s actions and effectively drive growth toward the targeted 5% for the year.

“This is the most significant PBOC stimulus package since the early days of the pandemic,” noted Julian Evans-Pritchard, an analyst at Capital Economics. “But on its own, it may not be enough.” The recent performance of China’s economy, marked by disappointing data, underscored the urgency for policymakers to provide more support.

While stocks and bonds rallied following the announcement, there remain concerns about the broader implications of the ongoing property crisis. The Chinese property market has been in a severe downturn since peaking in 2021, with numerous developers defaulting and leaving behind substantial inventories of unsold apartments and incomplete projects. Despite efforts to remove home purchase restrictions and lower mortgage rates, these actions have yet to yield a significant revival in demand or stabilize falling home prices, which experienced their sharpest decline in over nine years in August.

As the PBOC’s measures aim to support the housing sector, the lack of concrete strategies targeting real economic activities raises questions about their long-term effectiveness. Analysts from ANZ emphasized that “an aggressive fiscal policy is required to inject genuine economic demand,” suggesting that the PBOC’s measures are “far from being a bazooka” in terms of impact.

Global Context and Future Measures

The backdrop of these announcements is set against a global economic landscape marked by easing monetary conditions. The recent decision by the U.S. Federal Reserve to cut rates has provided the PBOC with an opportunity to follow suit without putting excessive pressure on the yuan. Lynn Song, chief economist for greater China at ING, indicated, “There is still room for further easing in the months ahead as most global central banks are now on a rate cut trajectory.”

As local governments accelerate bond issuance to fund infrastructure projects, the expectation is that more comprehensive fiscal initiatives will complement the PBOC’s monetary measures. Investment banks such as Goldman Sachs, Nomura, UBS, and Bank of America have recently revised down their growth forecasts for 2024, signaling that more robust policies may be necessary to stabilize the economy.

China’s broad rate cuts and stimulus measures reflect a concerted effort to spur economic growth and stabilize key sectors amid ongoing challenges. While the measures announced by the PBOC are a significant step towards addressing the economic slowdown, their effectiveness will ultimately depend on the government’s ability to complement these actions with fiscal policies that drive genuine economic demand. As the country navigates this critical juncture, the coming months will be pivotal in determining the trajectory of China’s economic recovery.

(Adapted from MarketScreener.com)

Categories: Economy & Finance, Regulations & Legal, Strategy