China has announced a series of stimulus measures, including a cut in its benchmark interest rate, as it grapples with a slowdown in the world’s second-largest economy.
In a public briefing on Tuesday, the People’s Bank of China also announced more support for the struggling property sector, as well as a state fund to revive the stock market and help with share buybacks.
While economists were sceptical that China could meet its full-year growth target of 5%, Bank of China Governor Pan Gongsheng said the measures were aimed at ‘supporting the steady growth of China’s economy’ and ‘promoting a moderate price recovery’.
China’s blue-chip CSI 300 index, which tracks shares traded in Shanghai and Shenzhen, rose 3.8 per cent on Tuesday after the announcement. Hong Kong’s Hang Seng index rose 3.9 per cent, led by mainland Chinese companies listed in the region.
Pan said the central bank’s main policy rate, the short-term seven-day reverse repurchase rate, would be cut to 1.5 per cent from 1.7 per cent.
“The central bank will also cut the reserve requirement ratio, the amount of reserves lenders must hold, by 0.5 percentage points, signalling a possible further cut of 0.25 to 0.5 percentage points this year. The RRR cut will provide Rmb1 trillion ($142 billion) of liquidity to the banking system”, he said.
“The rare simultaneous cut in policy rates and the RRR, the relative size of the cuts, and the unusual guidance on further policy easing all point to policymakers’ growing concern about headwinds to growth,” Goldman Sachs analysts said in a note to clients. “In our view, this signals a new round of policy easing to support the real economy,” he said.
“However, further demand easing – especially fiscal easing – is likely to be needed to improve China’s growth outlook,” they added.
China’s economic growth has slowed in recent months as a prolonged downturn in the property sector has weakened consumer sentiment and reduced spending.
Economists have cut growth forecasts below the government’s official target of 5 per cent by 2024 as deflationary forces persist and producer prices have fallen since last year.
Policymakers have turned to exports in the hope that the housing crisis will bottom out, but strong shipments of electric vehicles, batteries and other goods have failed to fully offset the weak domestic economy.
“China’s economy is recovering, and the monetary policy our bank has introduced this time will help support the real economy, stimulate spending and investment, while providing a stable floor for the exchange rate,” Pan said.
Pan was joined by Li Yunze, director of the National Financial Regulatory Administration, the new financial sector watchdog, and Wu Qing, chairman of the China Securities Regulatory Commission, the market regulator.
The government will boost stock market liquidity by allowing brokers, insurance companies and funds to use central bank facilities to buy shares, officials said. The People’s Bank of China will also provide credit facilities for shareholders to buy back shares.
“A new stimulus is definitely positive,” said Liu Chang, macro economist at BNP Paribas Asset Management.
But with economic momentum weak heading into the fourth quarter, he said the authorities would have to ‘move very quickly to implement additional measures in the coming weeks if they want to achieve the 5 per cent target’.
In this context, we think there is still a worrying lack of urgency behind their words on stimulus,” Liu said.
Among other measures, the bank reduced mortgage down payments for second homes from 25 per cent to 15 per cent. Second homes had previously been subject to stricter conditions to curb property speculation, a focus of President Xi Jinping.
The central bank also said it would improve conditions for its destocking programme, under which it is providing Rmb300 billion to local state-owned enterprises to help them buy unsold inventory from property developers.
Economists say reducing China’s unsold housing stock is crucial to restoring confidence in the economy and boosting domestic consumption.
