China’s central bank unleashed an unprecedented blitz of policy support for the economy, as authorities made their boldest swing so far to hit this year’s annual growth target of about 5%, after a flurry of Wall Street banks downgraded their forecasts.
People’s Bank of China
governor
Pan Gongsheng
cut the amount of money banks must hold in reserve to the lowest level since at least 2020, and reduced a key policy rate at a rare briefing in Beijing on Tuesday.
That marked the first time both measures were slashed on the same day in the past decade, underscoring the urgency of his task.
The central bank chief also unveiled a package to shore up the nation’s troubled property sector, including lowering borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.
For the nation’s beleaguered equity market, China will unlock at least 800 billion yuan ($113 billion) of liquidity support, Pan added, noting officials were studying setting up a stock stabilization fund.
Financial markets gave the package a thumbs-up. The CSI 300 Index rose for a fifth straight day, gaining as much as 1.3%, with over 200 of the companies in the gauge climbing. Commodities markets eked out small gains and the yuan was little changed against the dollar. Government bonds flipped to a loss on the stock gains. China’s 10-year bond yields rose 2 basis points to 2.05%, erasing an earlier decline to a record low.
But while Pan’s policy barrage beat expectations, and likely put the growth target back in sight, analysts questioned whether it was enough to break China’s deflationary spiral and entrenched real estate crisis.
“It’s hard to say what silver bullet can help resolve everything,” said Ken Wong, Asian 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 in order to help solidify fourth quarter growth.”
This will be a day to remember for China’s monetary policy. The People’s Bank of China unleashed a barrage of measures, from cuts to interest rates and reserve requirements to making central bank funding available for investors to purchase stocks. Each individual step on its own is significant. Delivering them all at once is highly unusual and speaks to the urgency felt in Beijing to head off deflationary risks and get growth on track for this year’s 5% target … We estimate the boost to 2024 growth to be around 0.2 ppt, with most of the impact falling in 2025.
Chang Shu, China economist
Chang Shu, China economist
President Xi Jinping’s government has been trying to give the economy a kick without resorting to bazooka stimulus packages of past years, but so far piecemeal efforts have failed to arrest the slowdown. That deterioration — growth has slowed to its worst pace in five quarters — is testing the leadership’s tolerance for missing a high-profile 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 revealed measures in one go,” said Larry Hu, head of China economics at Macquarie Group Ltd. “The stimulus push will still need coordination from other policies — particularly follow-up policies from the fiscal side.”
The Federal Reserve’s bigger-than-expected half-percentage point slash has given central banks across Asia more room to move. But making money cheaper won’t lift the economy if Chinese consumers don’t want to spend because layoffs are looming amid sliding corporate profits and property prices are still falling. New home prices clocked their biggest decline last month from the previous period since 2014.
China’s Government Spending Drops | Revenue is down because land sales fell, so spending is also down from last year
Pan’s decisive display of ramped up monetary policy now sets the stage for the Finance Ministry to unveil its own bid to defend the growth target. A plunge in revenue from land sales has held back fiscal spending this year, leaving indebted local governments with little bandwidth to invest in growth-boosting projects.
“It is too far from being a bazooka,” ANZ chief greater China economist Raymond Yeung said of the package. “We are not sure how much the mortgage rate cut will induce a property recovery.”
China’s property rescue package unveiled in May has failed to turn around a years-long real estate slump. Only 29 cities out of 200 urged to participate are heeding Beijing’s call to help absorb an excess of housing.
Details of Pan’s package:
- The seven-day reverse repurchase rate will be lowered to 1.5% from 1.7%
- RRR lowered by 0.5 percentage points, unleashing 1 trillion yuan ($142 billion) in liquidity
- MLF expected to be cut by 0.3 percentage points
- Cut the minimum down-payment ratio to 15% for second-home buyers, from 25%
- China may also cut the RRR further this year by another 0.25 to 0.5 percentage points
- RRR cut won’t apply to small, rural banks
- LPR and deposit rates will fall by 0.2 to 0.25 percentage points
- The PBOC to cover 100% of loans in program for local governments to buy unsold homes with cheap funding, up from 60%
The central bank governor unveiled his big policy shift at his first high-profile press conference since March, appearing alongside securities regulator chief Wu Qing, and Li Yunze, head of the National Financial Regulatory Administration. The trio used their collective public debut to roll out steps to salvage investor sentiment and stem a selloff in the stock market.
That included new financial tools to expand liquidity for the stock market, which would help listed companies and major shareholders buy back shares and raise holdings.
The PBOC chief has displayed a more transparent approach to policy this year, in a bid to stabilize sentiment. Pan used a similar briefing in January to announce a RRR cut two weeks ahead of time, as authorities tried to halt a $6 trillion stock-market rout.
“Monetary policy easing came in bolder than expected,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “We see room for bolder easing ahead in the coming quarters, following the Fed’s outsized rate cuts.”
