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China’s central bank on Tuesday announced broad monetary stimulus and property market support measures to revive an economy grappling with strong deflationary pressures and in danger of missing this year’s growth target.
The broader-than-expected moves mark the latest attempt by Chinese officials to restore confidence in the world’s second-largest economy after a slew of disappointing data in recent months.
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 liquidity into the economy, as well as to ease households’ mortgage repayment burden.
“The move probably comes a bit too late, but it is better late than never,” said Gary Ng, senior economist at Natixis.
“With an elevated real interest rate, poor sentiment and no rebound in the property market, China needs a lower-rate environment to boost confidence.”
Pan, speaking at a news conference alongside officials from two other financial regulatory agencies, said the central bank will in the near future cut the amount of cash that banks must hold as reserves – known as reserve requirement ratios (RRR) – by 50 basis points (bps).
That would free up about 1 trillion yuan ($141.93 billion)for new lending, though credit demand has been exceedingly weak.
Depending on the market liquidity situation later this year, the RRR may be further lowered by 0.25-0.5 percentage points, Pan said.
The People’s Bank of China will also cut the seven-day repo rate, its new benchmark, by 0.2 percentage points to 1.5%. The interest rate on the medium-term lending facility will drop by about 30 basis points, and loan prime rates by 20-25 bps.
Pan did not specify when the moves will come into effect.
Property Crisis Measures
The property market support package included a 50-bps reduction on average interest rates for existing mortgages, and a reduction of the minimum downpayment requirement to 15% on all types of homes, among other measures.
China’s property market has been in a severe downturn since peaking in 2021. A string of developers have defaulted, leaving behind large inventories of unwanted apartments and a troubling list of uncompleted projects.
Beijing has removed many home purchase restrictions and sharply lowered mortgage rates and downpayment requirements in response, but has so far failed to revive demand or arrest the sharp decline in home prices.
The property crisis has weighed heavily on the economy and crippled consumer confidence, given that 70% of household savings are parked in real estate.
August economic data broadly missed expectations, adding urgency for policymakers to roll out more support.
On the fiscal side, local governments have been quickening bond issuance to help fund infrastructure projects, and analysts expect further stimulus measures in coming weeks to bring economic growth back towards this year’s roughly 5.0% target.
Capital Economics analyst Julian Evans-Pritchard said Tuesday’s moves were “a step in the right direction,” but they would “probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support.”
Investment banks including Goldman Sachs, Nomura, UBS and Bank of America have recently cut their 2024 growth forecasts.
The latest Chinese policy measures come after the U.S. Federal Reserve last week delivered a hefty rate cut, which many analysts viewed as providing more head room for the PBOC to ease monetary conditions without putting too much pressure on the yuan.
“We continue to feel there is still room for further easing in the months ahead as most global central banks are now on an rate cut trajectory,” said Lynn Song, chief economist for greater China at ING.
