On Tuesday, China’s central bank announced an extensive package of monetary stimulus and support for the property market, aiming to bolster an economy facing significant deflationary pressures and the risk of falling short of its growth target for the year.
This comprehensive initiative is the latest effort by Chinese officials to restore confidence in the world’s second-largest economy, following a series of disappointing economic indicators in recent months. However, analysts pointed out that the plan lacks specific policies to stimulate real economic activity. With sluggish credit demand from both businesses and consumers, additional fiscal measures may be necessary to support the People's Bank of China's (PBOC) efforts and steer the economy back towards the targeted growth of approximately 5%.
"This is the most substantial stimulus package from the PBOC since the early pandemic days," remarked Julian Evans-Pritchard, an analyst at Capital Economics. "Yet, it might not suffice on its own."
Following the announcement, Chinese stocks and bonds surged, with Asian markets reaching their highest levels in 2.5 years. PBOC Governor Pan Gongsheng revealed plans to reduce borrowing costs, enhance liquidity, and alleviate the mortgage repayment burdens on households. He indicated that the central bank will soon lower the reserve requirement ratios (RRR) for banks by 50 basis points, potentially releasing about 1 trillion yuan (approximately $142 billion) for new loans. Depending on market conditions, further reductions of 0.25 to 0.5 percentage points may follow.
Additionally, the PBOC will cut the seven-day repo rate, its new benchmark, by 0.2 percentage points to 1.5%, while the medium-term lending facility rate will decrease by about 30 basis points and loan prime rates by 20 to 25 basis points.
"Although this move might be slightly delayed, it's better late than never," commented Gary Ng, senior economist at Natixis. "China requires a lower-rate environment to enhance confidence."
Pan did not provide a specific timeline for when these measures will take effect.
Support for the Property Market
The stimulus package includes measures aimed at the struggling property sector, such as a 50 basis point reduction in average interest rates on existing mortgages and lowering the minimum downpayment requirement to 15% for all types of homes.
China’s property market has faced severe challenges since its peak in 2021, with numerous developers defaulting and leaving behind unsold properties and unfinished projects. Although Beijing has relaxed many home purchase restrictions and lowered mortgage rates, these efforts have yet to reignite demand or halt declining home prices, which fell at the fastest rate in over nine years as of August. This crisis has significantly impacted the economy and undermined consumer confidence, as 70% of household savings are tied up in real estate.
To further support the capital market, the PBOC introduced two new initiatives: a swap program worth an initial 500 billion yuan to facilitate easier funding access for financial institutions to purchase stocks, and up to 300 billion yuan in low-cost loans to commercial banks for funding share purchases and buybacks.
Need for Aggressive Fiscal Policy
August’s economic data significantly missed expectations, prompting greater urgency for policymakers to enhance support measures. Local governments have accelerated bond issuance to fund infrastructure projects, but analysts argue that stronger fiscal actions are necessary to drive real economic improvement.
"An aggressive fiscal policy is necessary to generate real economic demand," noted analysts from ANZ, who characterized the PBOC's recent actions as "far from being a bazooka."
Investment banks, including Goldman Sachs, Nomura, UBS, and Bank of America, have recently downgraded their growth forecasts for 2024. These latest measures come in the wake of a significant rate cut by the U.S. Federal Reserve, which allows the PBOC to ease monetary conditions without exerting excessive pressure on the yuan.
"There remains potential for further easing in the upcoming months, especially as many global central banks are on a rate-cutting path," said Lynn Song, chief economist for greater China at ING. "If paired with a substantial fiscal policy push, we could see a recovery in momentum as we approach the fourth quarter."
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