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China has announced a broad stimulus package aimed at reviving its slowing economy. The People’s Bank of China (PBOC) is cutting its benchmark interest rate by 0.2 percentage points to 1.5%. Additionally, the bank will reduce the reserve requirement ratio by half a percentage point. By lowering this quota for the amount of money that commercial lenders must hold, around 1 tn yuan ($140 bn) of long-term liquidity will flow into the financial market, said central bank governor Pan Gongsheng.
In order to support the ailing property market, Pan said the PBOC would instruct banks to lower existing mortgage rates by around half a percentage point. The base rate for five-year mortgages was already cut from 3.95% to 3.85% in July. The governor also announced that the minimum down payment ratio for second mortgages will be lowered from 25% to 15%.
“To further stabilize economic growth, the PBOC will firmly adhere to the stance of supportive monetary policy, and increase the intensity of monetary policy regulation,” Pan said at a news conference in Beijing.
China’s new stimulus measure “not enough”
The measures released by the PBOC were broader than expected. However, analysts criticised the lack of concrete steps to stimulate the real economy saying fiscal stimulus would be needed.
China’s economic slowdown has led to growing concerns about its ability to reach its 2024 growth target of about 5%.
“This is the most significant PBOC stimulus package since the early days of the pandemic,” said Capital Economics analyst Julian Evans-Pritchard. “But on its own, it may not be enough,” he added.
Larry Hu, head of China economics at Macquarie Group, sees the primary purpose of the announced stimulus package as injecting confidence into the market. “The stimulus push will still need coordination from other policies — particularly follow-up policies from the fiscal side.”
A lot of economy watchers have recently downgraded their forecast for China’s growth. Goldman Sachs and Citigroup expect 4.7% growth this year.
Hui Shan, Chief China Economist, Goldman Sachs Research, said in a recent podcast: “The property numbers are even worse than we were expecting. We thought this year probably sales starts would be down 10% compared to last year. But it’s on track for 20% decline year-on-year.”
As he highlighted, slowing consumption is dragging growth down. “It was stable, but now we’re seeing for a few months consumption is slowing. Retail sales in the month of August only increased 2% from a year-ago levels. So, when you have the good exports and the bad property, but coupled with softening consumption, that’s really driven our view that the growth is going to be some distance away from around 5% growth target,” Shan opined.
“Overall, we feel today’s measures are a step in the right direction, especially as multiple measures have been announced together rather than spacing out individual piecemeal measures to a more limited effect,” said Lynn Song, Chief Economist, Greater China at ING.
“We continue to believe that there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory. If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter, he added.”
