On Tuesday, China’s central bank, the People’s Bank of China (PBOC), announced its most extensive stimulus package since the onset of the COVID-19 pandemic, aiming to lift the economy out of a deflationary slump and steer it back toward the government’s growth target. The newly introduced measures include increased funding, interest rate cuts, and policies designed to restore confidence in the world’s second-largest economy, which has recently been plagued by disappointing economic data and fears of a prolonged structural downturn.
Skepticism Over the Effectiveness of Liquidity Injections
Despite the broader-than-anticipated package, analysts are questioning the effectiveness of the PBOC’s liquidity injections. They note that weak credit demand from businesses and consumers may undermine the impact of these measures, especially in the absence of policies directly targeting real economic activity. Julian Evans-Pritchard, an analyst at Capital Economics, described the stimulus as “the most significant PBOC stimulus package since the early days of the pandemic,” but warned, “on its own, it may not be enough,” adding that additional fiscal stimulus might be necessary to achieve the government’s growth target of approximately 5% for the year.
Market Reactions and Future Monetary Policy Adjustments
Following the announcement, Chinese stocks and bonds surged, and Asian markets reached 2.5-year highs. The yuan also saw a significant increase, jumping to a 16-month high against the dollar. PBOC Governor Pan Gongsheng detailed plans to lower borrowing costs, inject more funds into the economy, and ease mortgage repayment burdens for households. Pan indicated that the central bank would soon reduce the reserve requirement ratios (RRR) for banks by 50 basis points, potentially freeing up about 1 trillion yuan for new lending. He also hinted at further RRR cuts later this year, depending on market liquidity, with the possibility of additional reductions of 0.25 to 0.5 percentage points.
In a rare forward-looking statement, Pan announced a 0.2 percentage point cut to the seven-day reverse repo rate, the new benchmark, bringing it down to 1.5%, along with reductions in other interest rates. Gary Ng, a senior economist at Natixis, commented on the timing, saying, “The move probably comes a bit too late, but it is better late than never. China needs a lower-rate environment to boost confidence.”
Addressing the Property Market Crisis
The PBOC’s stimulus package includes specific measures to support the beleaguered property market, such as a 50 basis point reduction in average interest rates for existing mortgages and a cut in the minimum down payment requirement to 15% for all types of homes. China’s property market, which has been in decline since its peak in 2021, has seen a string of developer defaults and a growing inventory of unsold and incomplete apartments. Despite previous efforts by Beijing to revive the sector through lower mortgage rates and relaxed purchase restrictions, demand has yet to recover, with home prices in August falling at their steepest rate in over nine years.
The property crisis has had a significant impact on the broader economy, particularly consumer confidence, as approximately 70% of household savings in China are tied up in real estate. Analysts remain skeptical about the latest measures’ effectiveness. As Gavekal Dragonomics analysts pointed out, “Households who are uncertain over their income prospects in a weak job market may not be willing to take on higher leverage.”
New Tools to Support the Capital Market
In an effort to bolster the capital market, the PBOC introduced two new financial tools. The first is a swap program, initially sized at 500 billion yuan, designed to provide funds, insurers, and brokers with easier access to capital for purchasing stocks. The second tool offers up to 300 billion yuan in low-cost PBOC loans to commercial banks, enabling them to support entities engaged in share purchases and buybacks.
Urgency for Additional Fiscal Support
The latest economic data from August fell short of expectations, intensifying the pressure on policymakers to introduce further support measures. While local governments have accelerated bond issuance to finance infrastructure projects, analysts argue that more aggressive fiscal policies are required to generate genuine economic demand. ANZ analysts described the PBOC’s latest moves as “far from being a bazooka” and emphasized the need for a robust fiscal response.
Several investment banks, including Goldman Sachs, UBS, and Bank of America, have recently lowered their growth forecasts for China for 2024. However, the PBOC’s actions come in the wake of a significant rate cut by the U.S. Federal Reserve, providing the PBOC with some leeway to ease monetary conditions without putting undue pressure on the yuan.
Lynn Song, ING’s chief economist for greater China, commented on the outlook, stating, “There is still room for further easing in the months ahead. If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.”
