China’s central bank launches most aggressive stimulus package since pandemic – Money Times

The central bank of China unveiled its biggest stimulus package since the pandemic on Tuesday (24) to pull the economy out of its deflationary state and back to meeting the government's growth target, but analysts warned that more fiscal aid is vital to achieving those goals.

The larger-than-expected package, offering more financing and interest rate cuts, marks the latest attempt by policymakers to restore confidence in the world's second-largest economy after a string of disappointing data raised concerns about a prolonged structural slowdown.

But analysts questioned how productive the People's Bank of China's liquidity injections would 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 most significant stimulus package from the central bank since the early days of the pandemic,” said Julian Evans-Pritchard, an analyst at Capital Economics.

“But on its own it may not be enough,” he added, saying more fiscal stimulus may be needed to get growth back on track towards this year’s official target of around 5%.

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Chinese stocks and bonds rose and Asian shares hit 2-1/2-year highs as central bank Governor Pan Gongsheng announced plans to lower borrowing costs and pump more funds into the economy, as well as ease the burden of household mortgage payments. The yuan jumped to a 16-month peak against the dollar.

Pan told a news conference that in the near future, the central bank will cut the amount of cash banks must hold as reserves – the reserve requirement ratio – by 50 basis points, freeing up about 1 trillion yuan ($142 billion) for new lending.

Depending on the market liquidity situation at the end of this year, the reserve requirement ratio could be further reduced by 0.25-0.5 percentage points, Pan said.

The central bank will also cut the seven-day reverse repurchase rate, its new benchmark, by 0.2 percentage point 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 measures would come into effect.

Measures for the real estate crisis

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

China’s property market has suffered a severe slowdown since its peak in 2021. A string of developers have defaulted, leaving behind large stockpiles of unwanted apartments and a worrying backlog of unfinished projects.

Beijing has removed many restrictions on home purchases and sharply reduced mortgage rates and down payment requirements in response, but so far it has failed to revive demand or halt the slide in home prices, which fell at the sharpest pace in more than nine years in August.

The housing crisis has weighed heavily on the economy and damaged consumer confidence, as 70% of household savings are invested 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 take on higher leverage,” analysts at Gavekal Dragonomics said in a note on the latest measures.

The Chinese central bank also introduced two new tools to boost the capital market.

The first – a swap program with an initial size of 500 billion yuan – allows funds, insurers and brokerages to more easily access financing to buy stocks; and the second offers up to 300 billion yuan in cheap loans from the central bank to commercial banks to help them finance purchases and buybacks of shares from other entities.

August economic data missed expectations, increasing the urgency for authorities to implement more support measures.

From a fiscal perspective, local governments have been ramping up bond issuance to help finance infrastructure projects, but analysts say more may be needed.

“Aggressive fiscal policy is needed to inject genuine economic demand,” ANZ analysts said in a note on the central bank’s measures.