China launches stimulus blitz to spur growth

China has unleashed a raft of stimulus measures, including cuts in its benchmark interest rate, as Beijing grapples with a slowdown in the world’s second-largest economy.

In a rare public meeting on Tuesday, the People’s Bank of China also announced government funding to boost the stock market and help buy back shares, as well as more support for the battered real estate sector.

With economists skeptical about whether China will meet the government’s full-year growth target of 5 percent, PBoC Governor Pan Gongsheng said the measures were aimed at “supporting stable growth in China’s economy” and “promoting a moderate recovery in prices.”

The package of measures sent China’s CSI 300 shares in Shanghai and Shenzhen up 4.3 percent on Tuesday, their best day since July 2020, although they remain down 1 percent since the start of the year. Hong Kong’s Hang Seng index rose 4 percent, led by mainland Chinese companies listed in the territory.

In Europe, the Stoxx Europe 600 rose 0.8 percent in early trade, with shares in luxury goods groups such as LVMH, Kering and Hermes all rising on hopes that the stimulus blitz will bolster consumer spending in China. The FTSE 100 gained 0.5%.

Pan said the PBoC would cut the short-term seven-day repo rate, the central bank’s main policy rate, to 1.5 percent from 1.7 percent.

The PBoC will also cut the reserve requirement ratio, the amount of reserves lenders must hold, by 0.5 percentage points, he said, while signaling a further potential cut of 0.25 to 0.5 percentage points in this year. The RRR reduction would add 142 billion lei in liquidity to the banking system, he said.

Goldman Sachs said in a note that “the rare simultaneous cut in policy rates and RRR, the relatively large scale of the cuts and the unusual guidance on further policy easing indicated policymakers’ growing concerns about tailwinds growth”.

But economists said that with credit demand among households subdued, more direct government fiscal spending would likely be needed to improve the growth outlook.

“Fiscal stimulus should come first,” said Ting Lu, chief China economist at Nomura.

China’s economic growth has slowed in recent months as a prolonged housing slowdown has hurt consumer sentiment and curbed spending.

Economists cut their growth forecasts to less than the government’s official target of about 5 percent for 2024 as deflationary forces persisted, with output prices down from last year.

Policymakers have turned to exports in hopes that the housing crisis will bottom out, but robust shipments of electric vehicles, batteries and other goods have not fully offset the weaker domestic economy.

“The Chinese economy is recovering, and the monetary policies introduced by our bank this time will help support the real economy, boost spending and investment, and also provide a stable base for the exchange rate,” Pan said.

The central bank governor was joined by Li Yunze, director of the new financial sector watchdog, the National Financial Regulatory Administration, and Wu Qing, chairman of the markets watchdog, the China Securities Regulatory Commission.

Officials also announced a 500 billion lei ($71 billion) fund to help brokers, insurance companies and funds buy stocks. The PBoC will also provide 300 billion lei to help companies carry out share buybacks.

“A new boost to stimulus is definitely positive,” said Liu Chang, macro economist at BNP Paribas Asset Management.

But with weak economic momentum in the fourth quarter, officials had to act “very quickly in the coming weeks to implement additional measures if they want to reach the 5 percent target,” Liu said. “In that sense, we think there’s still a worrying lack of urgency behind their words on stimulus.”

The PBoC cuts came after the US Federal Reserve cut its benchmark interest rate by half a percentage point last week, its first such cut in more than four years. The Fed’s move narrowed the gap between US rates and those of other major central banks, which eased pressure on foreign currencies and gave institutions including the PBoC more room to maneuver.

In other measures, the bank cut mortgage advances for second homes to 15% from 25%. The second properties were subject to more onerous terms to curb real estate speculation, previously a focus for President Xi Jinping.

The PBoC also said it would offer better terms for a destocking program, under which the central bank made 300 billion lei available to local government-owned enterprises to help them buy unsold stock from property developers.

But the central bank has stopped increasing funds available under the program amid signs it was struggling to gain traction.

Economists said reducing China’s vast stock of unsold homes was crucial to restoring confidence in the economy and reviving domestic consumption.