China’s central bank unveiled its strongest suite of economic stimulus measures since the start of the Covid pandemic, underlining the difficulty it faces in reviving an economy grappling with a prolonged property crisis and strong deflationary pressures.
Governor Pan Gongsheng said the People’s Bank of China will cut the amount of cash that banks must hold as reserves – known as reserve requirement ratios (RRR) – by 50 basis points. The People’s Bank of China will also cut a key policy rate by 0.2 percentage points to 1.5%.
Interest rates on existing mortgages will also be reduced by 0.5 percentage points on average, Pan said, in a move that could provide some relief to households but may raise concerns about bank profitability. Pan did not specify when the moves would come into effect.
“The move probably comes a bit too late, but it is better late than never,” said Gary Ng, senior economist at Natixis. “With an elevated real interest rate, poor sentiment and no rebound in the property market, China needs a lower-rate environment to boost confidence.“
The moves represent “the most significant … stimulus package since the early days of the pandemic”, Julian Evans-Pritchard, Head of China economics at Capital Economics.
But “it may not be enough”, he warned, adding a full economic recovery would “require more substantial fiscal support than the modest pick-up in government spending that’s currently in the pipeline”.
China’s economy has struggled to rebound from harsh pandemic-era lockdowns, and previous piecemeal efforts to support the economy have failed to arrest a slowdown that risks the government missing its annual economic growth target.
China’s economy grew much slower than expected in the second quarter, weighed down by a protracted property crisis and consumers’ worries about job security. August economic data broadly missed expectations, adding urgency for policymakers to roll out more support.
The government is aiming for economic growth of around 5.0% for 2024, but some investment banks including Goldman Sachs, Nomura, UBS and Bank of America have recently lowered their forecasts for China’s growth rate this year.
Stocks rose and the onshore yuan opened at its strongest level since May 2023 on Tuesday’s news.
The yield on China’s benchmark 10-year government bond fell four basis points to 2.036%, close to the record low hit last week, while 30-year treasury futures for December delivery rose to a record high.
Pan said further monetary policy easing, including another RRR cut, was on the cards later this year.
The latest Chinese policy measures come after the US Federal Reserve last week delivered a hefty rate cut, which many analysts viewed as providing more head room for China’s central bank to ease monetary conditions without putting too much pressure on the yuan.
With Reuters and Agence France-Presse