China's central bank has launched its most aggressive stimulus package since the pandemic, aiming to jolt its faltering economy back on track amid growing concerns of a prolonged structural slowdown. The People's Bank of China (PBOC) on Tuesday announced a sweeping set of measures, including interest rate cuts and funding injections, in an effort to steer the world's second-largest economy towards its annual growth target of around 5%. While the move sparked a rally in Chinese markets, experts remain cautious, pointing to weak consumer demand and continued challenges in the property sector.
Pan Gongsheng, governor of the PBOC, laid out the central bank's comprehensive plan, which includes cutting the reserve requirement ratio (RRR) for banks by 50 basis points, freeing up approximately 1 trillion yuan ($142 billion) in new lending. The RRR is the amount of cash banks are required to hold in reserve. Pan indicated that a further cut, between 0.25 and 0.5 percentage points, may come later this year, depending on liquidity conditions. This is a rare move for the PBOC, which typically avoids making forward-looking statements.
"These are the most significant measures from the PBOC since the early days of the pandemic," said Julian Evans-Pritchard, a senior analyst at Capital Economics. However, he added a note of caution: "While this stimulus is significant, it might not be enough to hit this year's growth targets without additional fiscal support."
The PBOC's announcement comes after months of sluggish economic data raised fears of deflation. China's economy has struggled to regain momentum following its post-pandemic recovery, with weak consumer demand, a sagging property market, and declining industrial activity. The central bank's intervention also follows a sharp downturn in China's real estate sector, which has weighed heavily on household wealth and consumer confidence.
As part of the stimulus, the PBOC will also reduce the seven-day reverse repo rate by 20 basis points to 1.5%, in an effort to make borrowing more affordable. In addition, a property market relief package was introduced, which includes a 50 basis point cut in the average interest rate for existing mortgages and a reduction in the minimum downpayment for all home purchases to 15%.
The Chinese property market has been in freefall since peaking in 2021. Several major developers have defaulted, leaving behind unfinished projects and unsold homes, which have contributed to falling home prices. In August, home prices recorded their sharpest decline in over nine years, exacerbating the crisis.
"China needs a lower-rate environment to boost confidence," said Gary Ng, senior economist at Natixis. "While these steps come late, they are still better than doing nothing."
Despite the PBOC's efforts, analysts remain skeptical about the potential impact. The economy's deeper structural issues, particularly within the property sector, continue to undermine efforts to revive growth. "Households who are uncertain about their income prospects in a weak job market may not be willing to take on higher leverage," analysts at Gavekal Dragonomics noted, underscoring that weaker job prospects and low consumer sentiment could dampen the effectiveness of the stimulus.
Pan also introduced new tools aimed at boosting the capital market. One of these, a 500 billion yuan swap program, will allow financial institutions to access funding more easily, enabling them to buy stocks. Another program will provide 300 billion yuan in low-interest loans to banks to finance share purchases and buybacks by companies.
China's latest economic measures follow a wave of disappointing data that has caused investment banks to revise down their growth forecasts for 2024. Banks including Goldman Sachs, Nomura, and UBS have all lowered their growth projections amid concerns over weak domestic demand and the slowdown in industrial activity.
The broader economic challenges facing China have prompted calls for even more aggressive fiscal policies. Local governments have already accelerated bond issuance to finance infrastructure projects, but many experts believe this will not be enough to stimulate meaningful growth. "An aggressive fiscal policy is required to inject genuine economic demand," analysts at ANZ noted. They described the PBOC's measures as "far from being a bazooka."
China's move comes on the heels of the U.S. Federal Reserve's recent interest rate cut, which provided some room for the PBOC to act without putting undue pressure on the yuan. The PBOC's decision to lower borrowing costs comes at a critical juncture, with Chinese authorities under pressure to ensure stability in the financial system while also encouraging investment and consumer spending.
Financial markets responded positively to the stimulus announcement, with Chinese stocks and bonds rallying. The Shanghai and Hong Kong stock markets each saw gains of more than 4% by the close of trading on Tuesday, reflecting investor optimism that the central bank's moves could help reignite economic growth. The yuan also surged to a 16-month high against the U.S. dollar.
While some analysts expressed optimism about the central bank's capacity to steer the economy in the right direction, others emphasized the need for additional support, particularly from the government's fiscal side. "There is still room for further easing in the months ahead," said Lynn Song, chief economist for greater China at ING. "But without a substantial fiscal policy push, we may not see significant momentum until the fourth quarter."
