China ramps up stimulus to prop struggling economy, announces more interest rate cuts

Sept. 27, 2024, 4:26 a.m.

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China’s central bank on Friday lowered interest rates and injected liquidity into the banking system as Beijing assembled a last-ditch stimulus assault to pull economic growth back towards this year’s roughly 5 per cent target.

More fiscal measures are expected to be announced before China’s week-long holidays starting on Oct. 1, after a meeting of the Communist Party’s top leaders showed an increased sense of urgency about mounting economic headwinds.

Following the Politburo meeting, China intends to issue special sovereign bonds worth approximately 2 trillion yuan ($284.43 billion) this year as part of a new fiscal stimulus package, according to two sources familiar with the matter.

Advertisement Capital Economics chief Asia Economist Mark Williams estimates the package “would lift annual output by 0.4% relative to what it would otherwise have been”.

“It’s late in the year, but a new package of this size that was implemented soon should be enough to deliver growth in line with the ‘around 5 per cent’ target,” he said.

Chinese stocks are poised for their best weekly performance since 2008 on anticipated economic stimulus.

The world’s second-largest economy faces strong deflationary pressures due to a sharp property market downturn and frail consumer confidence, which have exposed its over-reliance on exports in an increasingly tense global trade environment.

A string of recent economic data has fallen short of expectations, leading economists to worry about the feasibility of the growth target and the potential for a long-term slowdown.

Data released on Friday revealed a sharp contraction in industrial profits during August.

“We believe the persistent growth weakness has hit policymakers’ pain threshold,” Goldman Sachs analysts said in a note.

As flagged on Tuesday by Governor Pan Gongsheng, the People’s Bank of China on Friday trimmed the amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), by 50 basis points, the second such reduction this year.

This move is expected to inject 1 trillion yuan ($142.5 billion) of liquidity into the banking system and was accompanied by a reduction in the benchmark interest rate on seven-day reverse repurchase agreements by 20 basis points to 1.50 per cent.

Advertisement The chart shows China’s 5-year loan prime rate, 1-year loan prime rate, 1-year MTLF rate and 7-day reverse repo rate. (Photo: Reuters) The cuts take effect on Friday and Pan, in rare forward-looking remarks, left the door open to another RRR reduction later this year.

Fiscal oomph

With subdued credit demand from both individuals and businesses, investors are keenly focused on the fiscal measures that are widely anticipated in the coming days.

Reuters reported on Thursday that the 1 trillion yuan raised through special bonds will be allocated to increase subsidies for a consumer goods replacement program and the enhancement of large-scale business equipment.

These funds will also be used to provide a monthly allowance of approximately 800 yuan, equivalent to $114, per child to all families with two or more children, excluding the first child.

Advertisement China intends to raise an additional 1 trillion yuan through a special sovereign debt issuance. This issuance aims to support local governments in addressing their debt challenges.

Bloomberg News reported on Thursday that China is considering a capital injection of up to 1 trillion yuan into its largest state-owned banks.

Most of China’s fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13 trillion in debt.

The impending fiscal measures would represent a subtle shift toward promoting consumption, a direction Beijing has advocated for over a decade but has made limited progress in achieving.

Advertisement China’s household spending is less than 40 per cent of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above but has been fuelling much more debt than growth.

The politburo also committed to stabilizing the struggling real estate market, stating that the government should expand the list of housing projects eligible for additional financing and revitalize unused land.

The September meeting is not typically a platform for economic discussions, indicating heightened concern among officials.

“The ‘shock and awe’ strategy could be meant to jumpstart the markets and boost confidence,” Nomura analysts said in a note.

Advertisement “But eventually it is still necessary for Beijing to introduce well thought policies to address many of the deep-rooted problems, particularly regarding how to stabilize the property sector.”