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On Tuesday, 24th September China’s central bank announced its most substantial stimulus measures since the pandemic, aiming to lift the economy out of its deflationary slump and align it with the government’s growth targets. However, analysts cautioned that additional fiscal support is crucial to achieve these objectives.
The unexpectedly comprehensive package, which includes increased funding and interest rate reductions, represents the latest effort by policymakers to rebuild confidence in the world’s second-largest economy, following a series of disappointing economic data that raised fears of a prolonged structural downturn.
Nonetheless, experts expressed doubts about the effectiveness of the People's Bank of China's (PBOC) liquidity injections, citing extremely low credit demand from both businesses and consumers, and pointed out the lack of initiatives to promote real economic activity.
Julian Evans-Pritchard, an analyst at Capital Economics, stated, "This is the most substantial stimulus package from the PBOC since the early days of the pandemic." He also mentioned that, "by itself, it may not be sufficient," indicating that additional fiscal stimulus could be necessary to steer growth back toward this year’s official target of around 5%.
Stimulus Sparks Market Rally
Chinese stocks and bonds surged, and Asian stocks reached their highest levels in two and a half years after Governor Pan Gongsheng unveiled measures to reduce borrowing costs, inject additional funds into the economy, and ease mortgage repayment burdens for households. The yuan also climbed to a 16-month high against the U.S. dollar.
The central bank is set to reduce the reserve requirement ratio (RRR) for banks by 50 basis points (bps) in the near future, releasing approximately 1 trillion yuan ($142 billion) for new lending. Pan suggested that, depending on market liquidity later this year, the RRR could be further cut by an additional 0.25 to 0.5 percentage points—a rare forward-looking statement.
The PBOC will also lower the seven-day reverse repo rate, its new benchmark, by 0.2 percentage points to 1.5%, along with other key interest rates. "Although this move may be overdue, it’s better late than never," remarked Gary Ng, senior economist at Natixis. "China needs a lower interest rate environment to restore confidence."
Property Crisis Response Measures
China's property market has been experiencing a severe downturn since its peak in 2021. Multiple developers have defaulted, resulting in a large inventory of unsold apartments and numerous unfinished projects. In response, a support package was introduced, which includes a 50 basis point reduction in average interest rates for existing mortgages and a reduction in the minimum down payment requirement to 15% for all types of homes, among other initiatives.
To counter the slump, Beijing has lifted many home purchase restrictions and significantly lowered mortgage rates and down payment requirements. However, these efforts have yet to revive demand or halt the sharp decline in home prices, which fell at their fastest rate in over nine years in August. The ongoing property crisis has severely impacted the economy and eroded consumer confidence, as 70% of household savings are tied up in real estate. Analysts remain skeptical that the latest measures will be enough to bring about a meaningful recovery.
The PBOC has launched two new initiatives aimed at boosting the capital market. The first is a swap program, initially valued at 500 billion yuan, which enables funds, insurers, and brokers to access funding more easily for stock purchases. The second offers up to 300 billion yuan in low-cost PBOC loans to commercial banks, helping them finance share purchases and buybacks for other entities.
Market Outlook
August’s economic data largely fell short of expectations, increasing the urgency for policymakers to implement additional support measures.
On the fiscal front, local governments have accelerated bond issuance to finance infrastructure projects, but analysts believe more action is necessary. ANZ analysts noted in a report on the PBOC's moves that “an aggressive fiscal policy is needed to generate real economic demand,” and described the recent measures as “far from a bazooka.”
Several investment banks, including Goldman Sachs, UBS, and Bank of America, have recently revised down their 2024 growth forecasts. China's latest measures follow a significant rate cut by the U.S. Federal Reserve last week, enabling the PBOC to ease monetary policy without exerting excessive pressure on the yuan.
"There is still room for further easing in the months ahead," said Lynn Song, chief economist for greater China at ING. "If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter."
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