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The People’s Bank of China (PBOC) announced stimulus measures for banks and mortgage owners on September 24, as the country scrambles to hit its 2024 annual GDP growth target of 5%.
Some of the measures, unveiled by the PBOC governor Pan Gongsheng at a press conference, include cutting the short-term seven-day reverse repo rate to 1.5% from 1.7%, and cutting the reserve requirement ratio (RRR) -- the amount of funds that banks must keep at the central bank -- by 0.5%. This latter move, which doesn't apply to smaller, rural banks, could add around Rmb1 trillion ($140 billion) of liquidity into the market, said Pan.
The RRR for large and medium-sized banks will be lowered to 6% and 8% from 6.5% and 8.5% respectively. The 5% RRR for small and regional banks is unchanged. The PBoC also for the first time in history provided “forward guidance” on the RRR, stating it may deliver another 25–50 basis point cut, depending on conditions, before year-end.
In another move, outstanding mortgage rates for individual borrowers will be cut by 0.5%, potentially helping around 50 million households, or 150 million people, by cutting their overall annual interest expenses by Rmb150 billion ($21.3 billion). Thsi should in turn boost investment and consuption, said Pan, who was speaking alongside Li Yunze, minister of the National Administration of Financial Regulation, and Wu Qing, chariman of the China Securities Regulatory Commission.
Given the other changes, the PBOC expects this measure to have a neutral impact on China’s struggling banks, while core tier 1 capital at China's largest banks would be increased in a gradual manner.
In addition, down payments on the purchase of second homes are to be reduced from 25% to 15%, to come in line with amount for first homes; the amount had been cut from 30% to 25% in May.
China has been struggling to turnaround a real estate crisis with the value of new-home sales falling around 27% in August compared to a year earlier.
Wei Li, head of multi-asset investments, China, BNP Paribas told FinanceAsia: “The PBOC has announced a significant set of monetary easing measures to address growing concerns over China's economic slowdown. The stimulus includes a 20 basis point (bp) cut to primary policy rates, a 50bp reduction in the reserve requirement ratio (RRR), and a 50bp cut on existing mortgage rates. This rare combination of simultaneous rate cuts and RRR reductions, along with guidance on further easing, underscores the central bank's heightened focus on supporting the real economy.”
Li continued: “The measures aim to inject long-term liquidity into the banking system, with the 50bp RRR cut expected to release approximately Rmb1 trillion. More cuts could follow, with the PBOC hinting at an additional 25-50bp RRR reduction by year-end. The central bank is also easing property policies, lowering second-home down payments and guiding banks to reduce mortgage rates, potentially alleviating financial pressures on millions of households.”
A Rmb300 billion stimulus for regional governments to buy unsold homes from developers has yet to see major dividends.
The PBOC will also set-up a swap facility for securities firms, funds and insurance companies to tap liquidity from the central bank to buy stocks by pledging assets. It is undestood that up to Rmb500 billion could be made available for this.
There is also a plan to set up a specialised refinancing facility for listed companies and major shareholders to buy back shares and raise holdings.
BNP Paribas’s Li commented: “The PBOC is introducing new monetary tools to support the equity market, including a Rmb500 billion liquidity provision for non-bank financial institutions and a relending program for banks to fund share buybacks by listed companies. Additionally, the government's plan to inject capital into large state-owned banks aims to ensure credit growth and financial stability. The expansion of SME loan policies underscores the central bank's focus on supporting the backbone of the economy, helping small businesses navigate challenging conditions. These moves reflect a concerted effort to boost investor confidence and stabilise capital markets.”
Li continued: "Overall, these measures reflect a coordinated effort by the PBOC to balance the need for economic support with financial stability. The stability of the foreign exchange market and banks' profitability seem to be less of a concern for further monetary policy easing. The Chinese yuan has appreciated significantly against the USD over the past two months. Additionally, August marked the first month of net capital inflows since early 2023, indicating improved investor confidence. Furthermore, the PBOC has committed to lowering deposit rates, which should help maintain stable net interest margins for banks.”
However, Li cautioned that more action might be required in the near future, particulary on the demand side.
He said: While these measures represent an aggressive policy shift, the PBOC's actions may need to be complemented by fiscal stimulus to effectively boost demand and secure sustainable growth. With further RRR and policy rate cuts expected in Q4 2024 and into 2025, the central bank's stance signals long-term accommodation to buffer the economy against persistent headwinds. However, stronger demand-side measures will be critical to lifting China's growth outlook.”
At the end of the trading on Tuesday, September 4, the Hang Seng Index was up 4.13% to 19,000. China’s CSI 300 index of shares listed in Shanghai and Shenzhen were up 4.3%, its best day since July 2020, although the index is still down 1% since the start of the year.
