China’s central bank is adding stimulus in an effort to boost the economy – National
China’s central bank on Tuesday unveiled its biggest push since the outbreak of the pandemic to pull the economy out of its deflationary funk and return to the government’s growth target, but analysts warned that more fiscal aid was necessary to achieve these goals.
The broader-than-expected package of more stimulus and interest rate cuts marks the latest attempt by policymakers to restore confidence in the world’s second-largest economy after a slew of disappointing data raised concerns about a long-term structural slowdown.
But analysts doubt how the injections of Liquidity of the People’s Bank of China will be productive, given the very weak demand for credit from businesses and consumers, and note the absence of any policies aimed at supporting real economic activity.
“This is the PBOC’s most significant stimulus package since the early days of the pandemic,” said Capital Economics analyst Julian Evans-Pritchard.
“But by itself, it may not be enough,” he added, saying a fiscal stimulus may be needed to get growth back on track towards this year’s official target of around 5%.
Chinese stocks and bonds rallied and Asian stocks hit 2-1/2-year highs as Governor Pan Gongsheng announced plans to lower borrowing costs and inject more money into the economy, as well as ease the burden of mortgage payments. The yuan jumped to a 16-month high against the dollar.
Pan told a press conference that the central bank will soon reduce the amount of money banks must hold as reserves – known as reserve requirement ratios (RRR) – by 50 basis points (bps), freeing up about 1 trillion yuan ($142). billion) new loans.
Depending on the nature of the market deficit later this year, the RRR may be lowered again by 0.25-0.5 percent, Pan said, in unusual forward-looking remarks.
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The PBOC will also cut the seven-day reverse repo rate, its new benchmark, by 0.2 percent to 1.5 percent, as well as other interest rates.
“The move may have come too late, but it’s better late than never,” said Gary Ng, senior economist at Natixis.
“China needs a low-level environment to boost self-confidence.”
Pan did not specify when the move would take effect.
The housing market support package includes a 50 bps reduction in average interest rates for existing mortgages, and a reduction in the minimum down payment requirement to 15% for all types of homes, among other measures.
China’s real estate market has been in a critical state since its peak in 2021. A string of developers have failed, leaving behind a large inventory of unwanted apartments and a troubling list of unfinished projects.
Beijing has lifted many restrictions on home purchases and sharply lowered loan rates and down-payment requirements in response, but has so far failed to revive demand or arrest falling home prices, which fell at their worst pace in more than nine years in August.
The housing crisis has weighed heavily on the economy and crippled consumer confidence, given that 70% of household savings are parked in real estate. Analysts remain uncertain whether the latest measures will have much impact.
“Households uncertain about their income prospects in a weak labor market may not be willing to take on higher leverage,” analysts at Gavekal Dragonomics said in a note on the latest moves.
The PBOC also introduced two new tools to improve the money market.
The first – a 500 billion yuan exchange program – allows funds, insurers and brokers to easily access funding to buy shares; and the second is providing up to 300 billion yuan in cheap PBOC loans to commercial banks to help them finance buyouts and buybacks of other entities.
August economic data largely missed expectations, adding to the urgency for policymakers to release more support.
On the financial side, local governments have been accelerating bond issuance to help finance infrastructure projects, but analysts say more may be needed.
“A more aggressive monetary policy is needed to fuel real economic demand,” ANZ analysts said in a paper on the PBOC’s measures, which they described as “far from a bazooka.”
Investment banks including Goldman Sachs, Nomura, UBS and Bank of America recently cut their growth forecasts for 2024.
China’s latest moves come after the US Federal Reserve last week introduced a major rate cut, allowing the PBOC to ease monetary conditions without putting too much pressure on the yuan.
“There is still room for further cuts in the coming months,” said Lynn Song, chief China economist at ING.
“If we see more fiscal policy, momentum could return in the fourth quarter.”
