China shifts gears and rolls out sweeping economic stimulus

China's central bank announces a series of monetary easing measures to revive the sluggish economy
By Meagan Faryna
•
26 September 2024
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China central bank

China's central bank has unveiled a comprehensive package of monetary easing measures, marking a significant shift in policy aimed at reviving the country's sluggish economy.

As part of the stimulus, People's Bank of China (PBOC) Governor Pan Gongsheng announced a reduction in the reserve requirement ratio (RRR) for banks by 50 basis points.

This adjustment is designed to free up more capital for lending, potentially stimulating economic activity and boosting market confidence.

"We feel today's measures are a step in the right direction," said Lynn Song, chief economist for greater China at ING. Song praised the central bank for announcing multiple measures together, rather than introducing them piece by piece.

Pan also announced a 0.2 percentage point decrease in the 7-day repo rate, a key short-term lending rate.

He indicated that a reduction in the loan prime rate (LPR) might be on the horizon, a change that could lower borrowing costs across the entire economy.

China's property market gets a lifeline

These policy changes come as China faces falling prices and weak consumer spending, which have hit the housing market especially hard.

To address this, the central bank said it will extend existing support measures for the property market for two more years. This includes lowering interest rates on existing home loans.

"The slowdown of property market sales has made it difficult for real estate companies to deliver houses on schedule," said Li Yunze, minister of the National Financial Regulatory Administration.

Nomura, a financial services firm, estimated late last year that about 20 million houses in China had been pre-sold but not completed.

China launched a whitelist in January to prioritize support for certain real estate projects. This list identifies specific projects deemed worthy of financial support, helping to direct funds where they're most needed.

Li reported that over 5,700 projects have been approved, with financing totaling 1.43 trillion yuan ($200 billion). This has enabled the completion of more than 4 million homes.

Monetary moves outpace fiscal action

The PBOC's policy shifts also follow the Fed recent interest rate cut, which has given China more room to ease its own monetary policy without risking significant capital outflows.

While these monetary measures are substantial, some economists argue that more fiscal support is needed.

Edmund Goh, head of China fixed income at abrdn, expressed surprise at "a lack of fiscal stimulus even though they seem very willing to deploy monetary policy stimulus now."

“It just seems like PBOC has a more accurate read on the situation of the economy but they are unable to convince the central government to implement a bigger fiscal deficit,” he said.

ING's Song also sees room for more action.

“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,” he said. “If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.”

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