The People’s Bank of China unveiled its strongest set of economic stimulus measures since the coronavirus pandemic began, underscoring the difficulty of reviving an economy suffering from a prolonged real estate crisis and strong deflationary pressures.
Governor Pan Gongsheng said the central bank would cut the amount of cash banks must hold as reserves — the so-called reserve requirement ratio (RRR) — by 50 basis points. The central bank also cut its key policy interest rate by 0.2 percentage point to 1.5%.
Interest rates on existing mortgages will also be cut by an average of 0.5 percentage points, Pan said, a move that could bring some relief to households but raise concerns about banks’ profitability. Pan did not say when the measures would take effect.
“The move is probably a little late, but better late than never,” said Gary Ng, senior economist at Natixis. “With rising real interest rates, weakening business confidence and no signs of a property market recovery, China needs a low interest rate environment to boost confidence.”
Julian Evans-Pritchard, head of China economics at Capital Economics, said the measures were “the most significant economic stimulus since the early days of the pandemic”.
But he warned that “it may not be enough”, adding that a full economic recovery “will require much larger fiscal support than the small increases in government spending currently planned”.
China’s economy is struggling to recover from strict pandemic-era lockdowns and piecemeal efforts so far to support it have failed to halt the slowdown, risking the government missing its annual economic growth target.
China’s economy grew much slower than expected in the second quarter, weighed down by a lingering real estate crisis and consumer employment worries. Economic data for August came in much weaker than expected, highlighting the urgent need for policymakers to roll out further support measures.
The government aims for economic growth of around 5.0% in 2024, but some investment banks, including Goldman Sachs, Nomura, UBS and Bank of America, recently lowered their growth forecasts for China this year.
Shares rose on the news on Tuesday and the domestic yuan opened at its highest since May 2023.
Yields on China’s benchmark 10-year government bonds fell 4 basis points to 2.036%, near the record low hit last week, while futures for 30-year government bonds for delivery in December rose to a record high.
Pan said further easing of monetary policy, including a further cut in the reserve requirement rate, is expected later this year.
China’s latest policy moves come after the U.S. Federal Reserve made a sharp interest rate cut last week, which many analysts say will give the People’s Bank of China more room to ease monetary conditions without putting undue pressure on the yuan.
Reuters, Agence France-Presse
