China is rolling out a stimulus package to revive the economy and markets

(Bloomberg) — China’s central bank unveiled a sweeping package of monetary stimulus to revive the world’s second-largest economy, underscoring growing alarm within Xi Jinping’s government about slowing growth and declining investor confidence. .

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People’s Bank of China Governor Pan Gongsheng cut a key short-term interest rate and announced plans to cut the amount of money banks must hold in reserve to the lowest level since 2018, presenting at a rare meeting found alongside two of the other tops in the country. financial regulators in Beijing. This marked the first time that cuts to both measures were revealed on the same day since at least 2015.

These moves were followed by a series of other announcements that fueled gains in China’s stock market. The central bank chief also unveiled a package to support the nation’s housing sector, which includes lowering borrowing costs on up to $5.3 trillion in mortgages and easing rules on second home purchases.

For the nation’s stocks, Pan said the central bank would provide at least 800 billion yuan ($113 billion) worth of liquidity support, adding that officials were studying the establishment of a market stabilization fund.

While several of the measures were anticipated by investors, the highly publicized release showed that authorities are taking seriously warnings that China risks missing its growth target of around 5 percent this year. The political deadlock again puts that goal within reach, but doubts remain whether it was enough to break China’s long-term deflationary pressure and entrenched housing crisis.

Authorities have yet to unveil stronger measures to boost consumer demand, which some analysts see as a key missing ingredient for the economy.

“It’s hard to say what silver bullet can help solve it all,” said Ken Wong, Asia equity portfolio specialist at Eastspring Investments Hong Kong Ltd. “While it’s good to have monetary easing measures that are accommodative, more needs to be done to help strengthen growth in the fourth quarter.”

China’s benchmark CSI 300 share index rose as much as 4 percent, close to erasing losses for the year, although the gauge is still down more than 40 percent from its recent peak in 2021. Commodity markets gained and the yuan was little changed against the dollar. China’s 10-year bond yields rose 3 basis points to 2.06 percent, erasing an earlier decline to a record low.

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Policymakers in Beijing have tried to revive the economy without resorting to the broad-based stimulus that China has used in previous recessions, but such piecemeal efforts have been ineffective. Growth recently slowed to its worst pace in five quarters — a deterioration that tests management’s tolerance for missing its high-profile annual target for the second time in three years.

“The purpose of today’s briefing is to inject confidence into the market, judging by the fact that the authorities have unveiled measures in one go,” said Larry Hu, head of China economics at Macquarie Group Ltd. “The stimulus will have still need coordination from other policies – especially follow-up policies from the fiscal side.”

What Bloomberg Economics Says:

This will be a day to remember for China’s monetary policy. The People’s Bank of China has unleashed a flurry of measures, from cuts in interest rates and reserve requirements to making central bank funding available for investors to buy stocks. Each individual step is significant. Delivering them all at once is highly unusual and speaks to the urgency felt in Beijing to avoid deflationary risks and keep growth on track for this year’s 5% target… We estimate that growth in 2024 will be of about 0.2 ppt, with most of the impact falling in 2025.

Chang Shu, Chinese economist

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The Federal Reserve’s larger-than-expected half-percentage-point cut gave Asian central banks more room to maneuver. But making money cheaper won’t lift the economy if Chinese consumers don’t want to spend, as layoffs loom amid falling corporate profits and property prices still falling. New home prices last month saw their biggest year-over-year decline since 2014.

Pan’s decisive display of monetary policy tightening now sets the stage for the Finance Ministry to unveil its own bid to defend the growth target. A drop in revenue from land sales has hampered fiscal spending this year, crippling the ability of indebted local governments to invest in growth-stimulating projects.

“It’s too far from a bazooka,” ANZ chief China economist Raymond Yeung said of the package. “We’re not sure how much the mortgage rate cut will induce a property recovery.”

The central bank governor unveiled his major policy shift at his first high-profile press conference in March, appearing alongside securities regulator Wu Qing and Li Yunze, head of the National Financial Regulatory Administration. The trio used their collective public debut to implement measures to save investor sentiment and stem the stock market selloff.

These included new financial instruments to expand liquidity for shares, which would help listed companies and major shareholders buy shares and increase holdings.

The PBOC chief showed a more transparent approach to policy, Pan, on Tuesday, effectively planning rate cuts and policy moves for the rest of the year. He used a similar briefing in January to announce a cut in the RRR two weeks before it was due to take effect, as authorities tried to stem a stock market crash.

“The easing of monetary policy came bolder than expected,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “We see room for bolder easing in the coming quarters on the heels of huge Fed rate cuts.”

Read more: Xi sparks crisis for millions of China’s highest-paid workers

–With assistance from James Mayger, Ocean Hou, Alan Wong, Wenjin Lv, April Ma, and Iris Ouyang.

(Updates with details throughout)

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