China’s Central Bank Launches Largest Stimulus Since the Pandemic, but More Fiscal Help Needed
On September 24, 2023, China’s central bank, the People’s Bank of China (PBOC), unveiled its most substantial economic stimulus package since the onset of the pandemic. Faced with deflationary pressures and an economy struggling to meet its growth target, the PBOC introduced a comprehensive package of rate cuts and liquidity injections aimed at revitalizing the world’s second-largest economy. However, analysts warn that these monetary measures alone may not be sufficient, calling for further fiscal stimulus to restore confidence and growth.
Aggressive Rate Cuts and Liquidity Boosts
The PBOC’s stimulus package includes a series of aggressive actions, such as reducing interest rates and cutting the reserve requirement ratio (RRR). Governor Pan Gongsheng announced plans to lower the RRR by 50 basis points, freeing up 1 trillion yuan (approximately $142 billion) for new lending. Additional cuts of 0.25 to 0.5 percentage points may follow later this year, depending on market liquidity conditions.
In tandem, the central bank will reduce its seven-day reverse repo rate, its new benchmark, by 0.2 percentage points to 1.5%. These measures aim to lower borrowing costs and encourage banks to lend more freely, while also easing the financial burden on households, particularly in the property sector.
Despite the aggressive nature of these moves, experts like Julian Evans-Pritchard of Capital Economics caution that this monetary stimulus might not be enough to achieve China’s 2023 growth target of 5%. With weak credit demand from both consumers and businesses, the central bank’s efforts may need to be complemented by more robust fiscal interventions.
Property Market and Consumer Confidence
The stimulus also includes significant support for China’s beleaguered property market, which has been in decline since 2021. The central bank will cut mortgage interest rates by 50 basis points and reduce the minimum downpayment requirement to 15% for all types of homes. This comes after a series of defaults by major property developers and a sharp decline in home prices, which dropped in August at their fastest rate in over nine years.
Real estate is a crucial part of China’s economy, with 70% of household savings tied to property. The ongoing property crisis has not only dampened consumer confidence but has also severely impacted economic growth. Despite these new measures, analysts remain skeptical about their effectiveness, citing uncertainty over income prospects in a weak job market as a potential barrier to household spending and investment.
Capital Market Support
To further stabilize the economy, the PBOC introduced two new tools aimed at boosting the capital market. One of these tools is a swap program worth 500 billion yuan, designed to make it easier for funds, insurers, and brokers to access capital for stock purchases. Additionally, the central bank will provide up to 300 billion yuan in cheap loans to commercial banks, enabling them to fund share purchases and buybacks.
While these measures are expected to inject liquidity into the capital markets, some experts argue that a more direct and large-scale fiscal push is needed to generate genuine economic demand.
Calls for More Fiscal Stimulus
Though the PBOC’s actions mark an important step in stabilizing the economy, analysts stress the need for more aggressive fiscal policies. Local governments have accelerated bond issuance to fund infrastructure projects, but this may not be sufficient to restore growth. Institutions such as ANZ have described the PBOC’s moves as “far from being a bazooka” and have urged the government to implement stronger fiscal measures.
Major investment banks, including Goldman Sachs, Nomura, UBS, and Bank of America, have already downgraded their 2024 growth forecasts for China, highlighting concerns that the current stimulus package may not be enough to reverse the economic slowdown. However, with the U.S. Federal Reserve recently cutting rates, the PBOC’s monetary easing has been facilitated without excessive pressure on the yuan, providing some room for further measures.
Conclusion
China’s latest stimulus package from the PBOC is a bold step to combat deflationary trends and support economic recovery. However, with weak credit demand and a fragile property market, analysts believe that these monetary policies will need to be accompanied by more aggressive fiscal actions to restore momentum in the economy. As China approaches the fourth quarter of 2023, all eyes are on policymakers to see if they will respond with additional measures to meet the country’s ambitious growth targets
