China's central bank took significant steps on Tuesday to revive an economy facing growing deflationary pressures, weak consumer demand, and the potential of missing its 2024 growth target. In a sweeping announcement, the People's Bank of China (PBOC) introduced a broad monetary stimulus and property market support measures aimed at restoring confidence in the world’s second-largest economy, which has been grappling with a slowdown over recent months.
The broader-than-anticipated package includes plans to lower borrowing costs, inject liquidity into the economy, and ease mortgage repayment burdens. However, many analysts expressed concerns that these monetary measures alone may not be sufficient to address the deeper structural issues plaguing China's economy. Despite the measures, calls for more aggressive fiscal intervention have grown louder as the economic outlook remains uncertain.
A Slowdown Threatens China’s Growth Target
China’s economy has been underperforming for much of 2024, with deflationary trends, sluggish consumer spending, and underwhelming investment weighing heavily on growth. As a result, the economy is now in danger of missing the official growth target of around 5% set by the government earlier this year. In response, Chinese policymakers have been forced to implement new strategies to prevent the slowdown from deepening further.
The PBOC’s package is the most substantial set of economic support measures introduced since the early days of the COVID-19 pandemic. "This is the most significant PBOC stimulus package since the early days of the pandemic," remarked Julian Evans-Pritchard, an analyst at Capital Economics. "But on its own, it may not be enough."
Recent economic data has shown that China's economy is struggling to recover momentum, with a string of weak figures pointing to a slowdown in industrial output, consumer spending, and real estate investment. The situation has raised alarm bells among policymakers and economists, as weak demand from both businesses and consumers has hampered growth.
The People's Bank of China Steps In
In a move designed to address some of these concerns, PBOC Governor Pan Gongsheng outlined several key measures to stimulate the economy. Among them, the central bank announced it would lower the reserve requirement ratio (RRR)—the amount of cash banks must hold in reserve—by 50 basis points (bps). This reduction would free up around 1 trillion yuan ($142 billion) in liquidity for new lending, giving banks more room to extend credit and stimulate economic activity.
Pan also hinted that further RRR cuts could be in store later this year, depending on market conditions, with additional reductions of between 0.25 and 0.5 percentage points possible. Additionally, the PBOC plans to cut its seven-day repo rate, a new benchmark for short-term lending, by 0.2 percentage points, bringing it down to 1.5%. The interest rate on the medium-term lending facility will be cut by 30 bps, and loan prime rates will be reduced by 20-25 bps.
While these monetary policy changes are seen as essential, analysts caution that they may not be enough to stimulate real economic activity, particularly in an environment where businesses and consumers are reluctant to borrow. “China needs a lower-rate environment to boost confidence," said Gary Ng, senior economist at Natixis. "The move probably comes a bit too late, but it is better late than never."
Property Market in Crisis
One of the central components of the PBOC’s stimulus efforts is aimed at supporting China’s property market, which has been in a downturn since its peak in 2021. The property sector has long been a cornerstone of China's economic growth, with around 70% of household savings tied up in real estate. However, in recent years, the sector has suffered from over-leveraged developers, rising defaults, and falling property prices, leading to widespread concerns about financial stability.
To address these challenges, the PBOC announced measures that include a 50 bps reduction in average mortgage interest rates and a cut in the minimum downpayment requirement to 15% for all types of homes. The hope is that these changes will help ease the burden on homeowners and encourage more buyers to enter the market.
Despite these efforts, the property crisis has been a significant drag on the Chinese economy, dampening consumer confidence and curbing household spending. Home prices fell in August at their sharpest rate in over nine years, and a growing number of unfinished housing projects have left many prospective buyers in limbo.
The downturn has also exposed weaknesses in China’s real estate-driven growth model, as Beijing has struggled to revive demand despite removing purchase restrictions and slashing mortgage rates. Developers, meanwhile, have been left with large inventories of unsold apartments, and some have defaulted on their debts, deepening the crisis.
Capital Market Boost
In addition to the property market measures, the PBOC introduced two new tools aimed at boosting China’s capital markets. The first is a swap program, initially sized at 500 billion yuan, designed to allow funds, insurers, and brokers easier access to financing to purchase stocks. The second tool will provide up to 300 billion yuan in low-cost loans to commercial banks, enabling them to fund share purchases and buybacks.
These initiatives are intended to shore up China’s stock market and improve liquidity in the financial system, but analysts have expressed skepticism about their effectiveness in addressing the broader economic challenges facing the country.
Calls for More Fiscal Stimulus
Despite the PBOC’s latest measures, many analysts argue that more aggressive fiscal stimulus will be needed to put China back on a sustainable growth path. "An aggressive fiscal policy is required to inject genuine economic demand," wrote analysts from ANZ in a note, adding that the monetary package introduced by the PBOC is “far from being a bazooka.”
While local governments have ramped up bond issuance to fund infrastructure projects, more significant fiscal intervention may be required to stimulate growth. Infrastructure spending has traditionally been one of China’s go-to tools for propping up the economy during downturns, and policymakers may need to rely on it again to offset weak demand from the private sector.
In response to the weaker-than-expected economic data in August, several international investment banks, including Goldman Sachs, UBS, Nomura, and Bank of America, have downgraded their growth forecasts for China in 2024. The slowdown has raised concerns that the Chinese economy could face a prolonged period of sluggish growth unless more robust policy measures are enacted.
Global Context and Further Easing
The PBOC’s moves come on the heels of a rate cut by the U.S. Federal Reserve, which delivered a hefty 50 bps cut last week. This has provided some room for China to ease monetary conditions without putting too much downward pressure on the yuan, which has remained relatively stable in recent months.
“There is still room for further easing in the months ahead as most global central banks are now on a rate cut trajectory," said Lynn Song, chief economist for Greater China at ING. "If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter."
As China’s policymakers weigh their options, the question remains whether the measures taken so far will be enough to reverse the slowdown and restore confidence in the country’s economic future. With weak demand and deflationary pressures persisting, more comprehensive policy action may be required in the months to come.
(Source:www.voanews.com)
The broader-than-anticipated package includes plans to lower borrowing costs, inject liquidity into the economy, and ease mortgage repayment burdens. However, many analysts expressed concerns that these monetary measures alone may not be sufficient to address the deeper structural issues plaguing China's economy. Despite the measures, calls for more aggressive fiscal intervention have grown louder as the economic outlook remains uncertain.
A Slowdown Threatens China’s Growth Target
China’s economy has been underperforming for much of 2024, with deflationary trends, sluggish consumer spending, and underwhelming investment weighing heavily on growth. As a result, the economy is now in danger of missing the official growth target of around 5% set by the government earlier this year. In response, Chinese policymakers have been forced to implement new strategies to prevent the slowdown from deepening further.
The PBOC’s package is the most substantial set of economic support measures introduced since the early days of the COVID-19 pandemic. "This is the most significant PBOC stimulus package since the early days of the pandemic," remarked Julian Evans-Pritchard, an analyst at Capital Economics. "But on its own, it may not be enough."
Recent economic data has shown that China's economy is struggling to recover momentum, with a string of weak figures pointing to a slowdown in industrial output, consumer spending, and real estate investment. The situation has raised alarm bells among policymakers and economists, as weak demand from both businesses and consumers has hampered growth.
The People's Bank of China Steps In
In a move designed to address some of these concerns, PBOC Governor Pan Gongsheng outlined several key measures to stimulate the economy. Among them, the central bank announced it would lower the reserve requirement ratio (RRR)—the amount of cash banks must hold in reserve—by 50 basis points (bps). This reduction would free up around 1 trillion yuan ($142 billion) in liquidity for new lending, giving banks more room to extend credit and stimulate economic activity.
Pan also hinted that further RRR cuts could be in store later this year, depending on market conditions, with additional reductions of between 0.25 and 0.5 percentage points possible. Additionally, the PBOC plans to cut its seven-day repo rate, a new benchmark for short-term lending, by 0.2 percentage points, bringing it down to 1.5%. The interest rate on the medium-term lending facility will be cut by 30 bps, and loan prime rates will be reduced by 20-25 bps.
While these monetary policy changes are seen as essential, analysts caution that they may not be enough to stimulate real economic activity, particularly in an environment where businesses and consumers are reluctant to borrow. “China needs a lower-rate environment to boost confidence," said Gary Ng, senior economist at Natixis. "The move probably comes a bit too late, but it is better late than never."
Property Market in Crisis
One of the central components of the PBOC’s stimulus efforts is aimed at supporting China’s property market, which has been in a downturn since its peak in 2021. The property sector has long been a cornerstone of China's economic growth, with around 70% of household savings tied up in real estate. However, in recent years, the sector has suffered from over-leveraged developers, rising defaults, and falling property prices, leading to widespread concerns about financial stability.
To address these challenges, the PBOC announced measures that include a 50 bps reduction in average mortgage interest rates and a cut in the minimum downpayment requirement to 15% for all types of homes. The hope is that these changes will help ease the burden on homeowners and encourage more buyers to enter the market.
Despite these efforts, the property crisis has been a significant drag on the Chinese economy, dampening consumer confidence and curbing household spending. Home prices fell in August at their sharpest rate in over nine years, and a growing number of unfinished housing projects have left many prospective buyers in limbo.
The downturn has also exposed weaknesses in China’s real estate-driven growth model, as Beijing has struggled to revive demand despite removing purchase restrictions and slashing mortgage rates. Developers, meanwhile, have been left with large inventories of unsold apartments, and some have defaulted on their debts, deepening the crisis.
Capital Market Boost
In addition to the property market measures, the PBOC introduced two new tools aimed at boosting China’s capital markets. The first is a swap program, initially sized at 500 billion yuan, designed to allow funds, insurers, and brokers easier access to financing to purchase stocks. The second tool will provide up to 300 billion yuan in low-cost loans to commercial banks, enabling them to fund share purchases and buybacks.
These initiatives are intended to shore up China’s stock market and improve liquidity in the financial system, but analysts have expressed skepticism about their effectiveness in addressing the broader economic challenges facing the country.
Calls for More Fiscal Stimulus
Despite the PBOC’s latest measures, many analysts argue that more aggressive fiscal stimulus will be needed to put China back on a sustainable growth path. "An aggressive fiscal policy is required to inject genuine economic demand," wrote analysts from ANZ in a note, adding that the monetary package introduced by the PBOC is “far from being a bazooka.”
While local governments have ramped up bond issuance to fund infrastructure projects, more significant fiscal intervention may be required to stimulate growth. Infrastructure spending has traditionally been one of China’s go-to tools for propping up the economy during downturns, and policymakers may need to rely on it again to offset weak demand from the private sector.
In response to the weaker-than-expected economic data in August, several international investment banks, including Goldman Sachs, UBS, Nomura, and Bank of America, have downgraded their growth forecasts for China in 2024. The slowdown has raised concerns that the Chinese economy could face a prolonged period of sluggish growth unless more robust policy measures are enacted.
Global Context and Further Easing
The PBOC’s moves come on the heels of a rate cut by the U.S. Federal Reserve, which delivered a hefty 50 bps cut last week. This has provided some room for China to ease monetary conditions without putting too much downward pressure on the yuan, which has remained relatively stable in recent months.
“There is still room for further easing in the months ahead as most global central banks are now on a rate cut trajectory," said Lynn Song, chief economist for Greater China at ING. "If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter."
As China’s policymakers weigh their options, the question remains whether the measures taken so far will be enough to reverse the slowdown and restore confidence in the country’s economic future. With weak demand and deflationary pressures persisting, more comprehensive policy action may be required in the months to come.
(Source:www.voanews.com)