China rolled out a fresh batch of economic stimulus measures at yesterday's press conference. This rare, high-level event was scheduled right after the U.S. Federal Reserve took the significant step of lowering interest rates last week.

Pan Gongsheng, head of China's central bank, unveiled various monetary policies and financial steps. This kicked off a new wave of easing, giving China's central bank more room to slash rates and boost growth while fending off the looming specter of deflation.

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Key Takeaways from the Announcement

  • Another potential cut to the reserve requirement ratio (RRR) by 0.25–0.5 percentage points, following the 0.5% reduction earlier this year. According to Pan, this move freed up around 1 trillion yuan (~$70 billion) in long-term liquidity. 
  • Reducing interest rates on the central bank's open market operations (OMO), with the 7-day reverse repo rate anticipated to decrease by 0.2 percentage points, moving from 1.7% to 1.5%.
  • Standardizing down payment requirements for first and second mortgages. Down payments on second mortgages should drop from the current 25% to 15%. 
  • Managing coordinated cuts to loan and deposit rates to maintain commercial banks' net interest margin stability. 
  • Increasing the central bank's support ratio for the 300 billion yuan (~$21 billion) affordable housing fund, launched in May, from 60% to 100%. In practical terms, this means that instead of providing 6 billion yuan (~$420 million) for every 10 billion yuan (~$700 million) of affordable housing issued by commercial banks, the central bank will now supply the full 10 billion yuan at a low cost.

Later in the press conference, Pan hinted at a possible 0.2–0.25% reduction in the loan prime rate (LPR), though he didn’t specify when or whether he was referring to the one-year or five-year LPR. The loan prime rate influences loans for both businesses and individuals, including mortgages.

So, Is It All Pointless?

Analysts are questioning how effective the People’s Bank of China’s liquidity injections will be, given the incredibly weak demand for loans from businesses and consumers. They also point out a glaring lack of policies aimed at supporting real economic activity.

China’s economic growth has slowed, driven by a downturn in the real estate sector and low consumer confidence. Economists have been calling for more stimulus, especially on the fiscal front.

“This is the most significant stimulus package from the People’s Bank of China since the early days of the pandemic. But it may not be enough,” said Julian Evans-Pritchard, an analyst at Capital Economics. He added that more fiscal stimulus might be needed to get growth back on track toward the official target of about 5% for the year.

Edmund Goh, Head of China Fixed Income at ABRDN said:

We’re surprised by the lack of fiscal stimulus, although they seem very eager to lean on monetary policy right now. It seems like the PBOC has a better read on the situation in the economy, but they can’t convince the central government to implement a larger fiscal deficit.

A recent Goldman Sachs analysis noted that local government bond issuance was more about covering budget shortfalls than supporting additional growth. The real estate slump has slashed land sales, which were once a major source of revenue for local governments.

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And finally, Pan Gongsheng didn’t specify exactly when the central bank would ease policy but hinted it would be happening soon. In the meantime, we’re left wondering if they’ll manage to jump-start the economy or just keep fiddling with promises.

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