China’s central bank unveils most aggressive stimulus since pandemic

By Ryan Woo and Liangping Gao

BEIJING (Reuters) – China’s central bank unveiled its biggest post-pandemic stimulus on Tuesday to pull the economy out of a deflationary funk and return to the government’s growth target, but analysts warned more fiscal aid was vital to reach these objectives.

The broader-than-expected package, which offers more funding and interest rate cuts, marks the latest attempt by policymakers to restore confidence in the world’s second-largest economy after a series of disappointing data have raised concerns about a prolonged structural slowdown.

But analysts have questioned how productive the People’s Bank of China’s liquidity injections will be, given extremely weak credit demand from businesses and consumers, and noted 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 on its own, it may not be enough,” he added, saying more fiscal stimulus may be needed to get growth back on track toward this year’s official target of around 5 percent.

Chinese stocks and bonds rose, with Asian stocks hitting 2½-year highs, after Governor Pan Gongsheng announced plans to cut borrowing costs and inject more funds into the economy, as well as ease the burden of repayment of household mortgages. The yuan jumped to a 16-month high against the dollar.

Pan told a news conference that the central bank will in the near future reduce the amount of cash banks must hold as reserves – known as reserve requirements (RRR) – by 50 basis points (bps ), releasing about 1 trillion yuan ($142). billion) for new loans.

Depending on the market’s liquidity situation later this year, the RRR may be further cut by 0.25-0.5 percentage points, Pan said in rare forward-looking remarks.

The PBOC will also cut the seven-day reverse repo rate, its new benchmark, by 0.2 percentage points to 1.5%, as well as other interest rates.

“The move probably comes a little too late, but better late than never,” said Gary Ng, senior economist at Natixis.

“China needs a lower rate environment to boost confidence.”

Pan did not specify when the moves would take effect.

PROPERTY CRISIS MEASURES

The housing market support package included a 50bp cut in average interest rates for existing mortgages and a reduction in the minimum down payment requirement to 15% for all housing types, among other measures.

China’s housing market has been in a severe slump since peaking in 2021. A number of developers have gone into default, leaving behind large stocks of unwanted apartments and a worrying backlog of unfinished projects.

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Beijing has lifted many home-buying restrictions and sharply cut mortgage rates and down-payment requirements in response, but has so far failed to revive demand or halt the fall in home prices, which have fallen at their fastest pace since the past nine years in August.

The housing crisis has greatly affected the economy and crippled consumer confidence, given that 70% of household savings are parked in real estate. Analysts remain unconvinced that the latest measures will have a significant impact.

“Households that are uncertain about their income prospects in a weak labor market may not be willing to leverage more,” analysts at Gavekal Dragonomics said in a note on the latest measures.

The PBOC also introduced two new tools to stimulate the capital market.

The first – an initial 500 billion yuan swap program – allows funds, insurers and brokers easier access to financing to buy shares; and the second is providing up to 300 billion yuan in cheap PBOC loans to commercial banks to help them finance acquisitions and share buybacks of other entities.

NO BAZOOKA

Economic data in August broadly missed expectations, adding urgency for policymakers to provide more support.

Fiscally, local governments have stepped up bond issuance to help finance infrastructure projects, but analysts say more may be needed.

“Aggressive fiscal policy is needed to inject real economic demand,” ANZ analysts said in a note about the PBOC’s moves, 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 cut rates sharply, allowing the PBOC to ease monetary conditions without putting too much pressure on the yuan.

“There is still room for further easing in the coming months,” said Lynn Song, chief economist for Greater China at ING.

“If we also see a major boost from fiscal policy, momentum could pick up in the fourth quarter.”

(1 USD = 7.0456 Chinese Yuan Renminbi)

(Additional reporting by Joe Cash; Writing by Marius Zaharia; Editing by Shri Navaratnam and Kim Coghill)