China’s central bank unveils most aggressive stimulus since pandemic

BEIJING: China’s central bank on Tuesday unveiled its biggest stimulus since the pandemic to pull the economy out of its deflationary funk and back towards the government’s growth target, but analysts warned more fiscal help was vital to hit these goals.

The broader-than-expected package offering more funding and interest rate cuts marks the latest attempt by policymakers to restore confidence in the world’s second-largest economy after a slew of disappointing data raised concerns of a prolonged structural slowdown.

But analysts questioned how productive the People’s Bank of China’s liquidity injections would be, given extremely weak credit demand from businesses and consumers, and noted the absence of any policies aimed at supporting real economic activity.

“This is the most significant PBOC stimulus package since the early days of the pandemic,” said Capital Economics analyst Julian Evans-Pritchard.

“But on its own, it may not be enough,” he added, saying more fiscal stimulus may be needed to return growth to a trajectory towards this year’s official target of roughly 5%.

Chinese stocks and bonds rallied and Asian stocks hit 2-1/2 year highs as Governor Pan Gongsheng announced plans to lower borrowing costs and inject more funds into the economy, as well as to ease households’ mortgage repayment burden. The yuan currency jumped to a 16-month high against the dollar. Pan told a news conference the central bank will in the near future cut the amount of cash that banks must hold as reserves - known as reserve requirement ratios (RRR) - by 50 basis points (bps), freeing up about 1 trillion yuan ($142 billion) for new lending.

Depending on the market liquidity situation later this year, the RRR may be further lowered by 0.25-0.5 percentage points, Pan said, in rare forward-looking remarks.

The PBOC will also cut the seven-day reverse repo rate, its new benchmark, by 0.2 percentage points to 1.5%, as well as other interest rates.

“The move probably comes a bit too late, but it is better late than never,” said Gary Ng, senior economist at Natixis.

“China needs a lower-rate environment to boost confidence.” Pan did not specify when the moves will take effect.

The property market support package included a 50 bps reduction on average interest rates for existing mortgages, and a cut in the minimum downpayment requirement to 15% on all types of homes, among other measures.

China’s property market has been in a severe downturn since peaking in 2021. A string of developers have defaulted, leaving behind large inventories of unwanted apartments and a troubling list of uncompleted projects.