China’s Central Bank Takes Bold Steps to Revive the Economy

By: D. Ariaz

China’s economic engine is visibly slowing, and the government is taking action with its boldest intervention since the pandemic. Facing a debt-laden property market, dwindling growth, and pressure to meet a meagre 5% growth target, the People’s Bank of China (PBoC) has enacted a series of significant measures designed to stabilize the economy. These interventions, aimed at lowering loan costs and stimulating investment across all markets, are signs of an imminent shift in China’s approach to its economic sector, spearheaded with immediate relief for households and the real estate sector.
 
One prominent change is the reduction in interest rates. The PBoC cut rates on existing mortgages by 0.5 percentage points and reduced the reserve requirement ratio (RRR) for banks. These changes are expected to inject liquidity into the financial system, lower the cost of loans, and relieve pressure on debt-laden homeowners. Governor Pan Gongsheng of the PBoC estimates that such mortgage relief could help up to 50 million households, reducing their collective interest payments by 150 billion yuan (£16 billion) annually. Clearly, these measures seek to alleviate the financial strain that has been stifling household consumption and investment over recent decades.
 
Simultaneously, the PBoC has taken significant measures to boost China’s struggling stock market. By loosening restrictions on loans for stock investments, the central bank has sought to attract institutional and retail investors back to the market. Although it has not been a long time since the inauguration of the policies, they have already had a noticeable impact: within hours of the announcement, the Shanghai Composite Index surged by more than 4%. Investors are seeing these measures as a signal that the government is serious about propping up asset prices, leading to increased confidence in markets, both internally and abroad.
 
Perhaps the most delicate aspect of the policy is its approach to China’s real estate sector, which has been at the centre of the country's economic malaise. After years of rampant debenture, many proprietors are now on the brink of mandatory default, dragging down housing prices and eroding consumer trust. To stimulate demand, the PBoC has reduced the minimum deposit requirement for second-home purchases from 25% to 15%, a move that Pan believes will help kickstart the housing market.
 
China’s leadership has been cautious about reigniting a property bubble, which could potentially undo years of efforts to cool down an overheated market. Nonetheless, with a growing crisis threatening broader economic stability, the central bank’s latest actions reflect an acceptance that decisive intervention is necessary.
 
Economists remain divided on the potential impact of these policies. While conservatives like Gary Ng of Natixis argue that “China needs a lower-rate environment to boost confidence,” others, including Julian Evans-Pritchard of Capital Economics, suggest that the stimulus measures may not be enough. Evans-Pritchard points out that the scale of the intervention, although significant, pales in comparison to the stimulus seen during the early days of the pandemic. He argues that China may require “more substantial fiscal support” if it is to achieve a full recovery.
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The timing of China’s stimulus also coincides with global economic shifts. The recent rate cut by the U.S. Federal Reserve has given China the opportunity to lower its interest rates without putting too much pressure on the yuan. This has provided the PBoC with some room for manoeuvre, allowing it to focus on domestic growth without the immediate threat of capital outflows.
 
In conclusion, the People’s Bank of China has launched an ambitious program of economic stimulus, aimed at reviving growth, supporting the housing market, and restoring confidence in financial markets. While these steps are an acknowledgement of the gravity of China’s current economic situation, the long-term effectiveness of these measures remains to be seen. With further monetary easing on the horizon, China’s economic future now rests on the delicate balance between stimulating growth and avoiding the pitfalls of renewed debt-driven bubbles.