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China has unleashed a swath of stimulus measures including cuts to its benchmark interest rate as Beijing battles a slowdown in the world’s second-largest economy.
In a rare public briefing on Tuesday, the People’s Bank of China also announced government funding to boost the stock market and aid share buybacks, as well as more support for the stricken property sector.
With economists sceptical about whether China will hit the government’s full-year growth target of 5 per cent, PBoC governor Pan Gongsheng said the measures aimed to “support the stable growth of China’s economy” and “promote a moderate rebound in prices”.
The package of measures sent China’s CSI 300 index of Shanghai- and Shenzhen-listed shares up 4.3 per cent on Tuesday, its best day since July 2020, although it remains down 1 per cent since the start of the year. Hong Kong’s Hang Seng index rose 4 per cent, led by mainland Chinese companies listed in the territory.
In Europe, the broad Stoxx Europe 600 was up 0.8 per cent in early trading, with shares of luxury goods groups such as LVMH, Kering and Hermès all rising on hopes the stimulus blitz will strengthen Chinese consumer spending.
Commodity markets rose on the news, with iron ore recording its biggest daily gain in more than a year, rising 4 per cent on the Dalian spot market. On the London Metal Exchange, copper surged 2.2 per cent and aluminium rose 2.4 per cent.
Pan said the PBoC would reduce its short-term seven-day reverse repo rate, the central bank’s main policy rate, from 1.7 per cent to 1.5 per cent.
The PBoC will also cut the reserve requirement ratio, the amount of reserves lenders must hold, by 0.5 percentage points, he said, while signalling a further potential cut of 0.25 to 0.5 percentage points this year. The RRR cut would add Rmb1tn ($142bn) in liquidity to the banking system, he said.
Goldman Sachs said in a note the “rare simultaneous cut of policy rates and RRR, the relatively large magnitude of cuts and the unusual guidance on further policy easing indicated policymakers’ growing concerns over growth headwinds”.
But economists said that with loan demand muted among households, more direct government fiscal spending would probably be needed to improve the growth outlook.
“Fiscal stimulus should take the front seat,” said Ting Lu, chief China economist at Nomura.
China’s economic growth has decelerated in recent months as a prolonged slowdown in the property sector weighs on consumer sentiment.
Economists have slashed their growth forecasts to less than the government’s official target of about 5 per cent for 2024 as deflationary forces have persisted, with producer prices declining since last year.
Robust shipments of electric vehicles, batteries and other goods have not fully offset the weaker domestic economy.
“The Chinese economy is recovering and the monetary policies introduced by our bank this time will help support the real economy, incentivise spending and investment and also provide a stable footing for the exchange rate,” Pan said.
The central bank head was joined by Li Yunze, director of the National Financial Regulatory Administration, the new financial sector watchdog, and Wu Qing, chair of the China Securities Regulatory Commission, the markets supervisor.
The officials announced a Rmb500bn fund to help brokers, insurance companies and funds buy stocks. The PBoC will also provide Rmb300bn to help companies conduct share buybacks.
“A fresh stimulus push is certainly positive,” said Liu Chang, macro economist at BNP Paribas Asset Management.
But with a weak economic momentum heading into the fourth quarter, officials needed to act “very quickly in the weeks ahead to implement additional measures if they wish to get to the 5 per cent target”, Liu said. “We think there is still a worrying lack of urgency behind their words around stimulus.”
The PBoC’s cuts came after the US Federal Reserve last week cut its benchmark interest rate by half a percentage point. The Fed’s move narrowed the differential between the US and other major central banks’ rates, easing pressure on foreign currencies and giving institutions, including the PBoC, more room to manoeuvre.
In other measures, the PBoC lowered mortgage downpayments for second homes from 25 per cent to 15 per cent. Second properties had been subject to more onerous conditions to curb real estate speculation, previously a focus for President Xi Jinping.
The central bank also said it would improve the terms of a programme under which it has made Rmb300bn available to local government-owned enterprises to help them buy unsold inventory from property developers.
But the central bank stopped short of expanding the programme, amid signs it was struggling to gain traction.
Economists have said reducing China’s vast stock of unsold housing is crucial to restoring confidence and reviving domestic consumption.
The NFRA’s Li said regulators also had plans to recapitalise China’s largest commercial banks, whose margins and profits had been eroded by fee reductions and interest rate concessions.
To enhance their ability “to operate and develop steadily, and to better play their role as the main force in serving the real economy . . . the state plans to increase the core tier one capital of six large commercial banks”, Li said.
He gave no further details, but the core tier one capital adequacy ratio of China’s largest banks was above the 8.5 per cent required level as of the end of June.