China Launches Stimulus to Bolster Flagging Economy

China’s People’s Bank of China (PBOC) Governor Pan Gongsheng has announced plans to lower borrowing costs and allow banks to increase lending, following disappointing data that has raised expectations that the world’s second-largest economy will miss its 5% growth target this year. The move comes after a series of disappointing data has increased expectations that the world’s second-largest economy will miss its own 5% growth target this year. Stock markets in Asia jumped after the announcement.

The central bank will cut the amount of cash banks have to hold in reserve, known as reserve requirement ratios (RRR), initially by half a percentage point, freeing up about 1 trillion yuan ($142bn; £106bn). Another cut may be made later in the year. Further measures aimed at boosting China’s crisis-hit property market include cutting interest rates for existing mortgages and lowering minimum down payments on all types of homes to 15%.

The PBOC’s new economic stimulus measures come just days after the US Federal Reserve lowered interest rates for the first time in more than four years with a bigger than usual cut.

China has implemented a series of stimulus measures, including cuts to its benchmark interest rate, to combat a slowdown in the world’s second-largest economy. The People’s Bank of China (PBoC) announced government funding to boost the stock market and aid share buybacks, as well as more support for the stricken property sector. The measures aim to “support the stable growth of China’s economy” and “promote a moderate rebound in prices.” The package of measures sent China’s CSI 300 index of Shanghai- and Shenzhen-listed shares up 4.3% on Tuesday, its best day since July 2020, although it remains down 1.1% since the start of the year.

Hong Kong’s Hang Seng index rose 4.4%, led by mainland Chinese companies listed in the territory. In Europe, the broad Stoxx Europe 600 was up 0.8% in early trading, with shares of luxury goods groups such as LVMH, Kering, and Hermès all rising on hopes the stimulus blitz will strengthen Chinese consumer spending. Commodity markets rose on the news, with iron ore recording its biggest daily gain in more than a year, rising 4.5% on the Dalian spot market. On the London Metal Exchange, copper surged 2.2% and aluminium rose 2.4%.

The PBoC will reduce its short-term seven-day reverse repo rate, the central bank’s main policy rate, from 1.7% to 1.5%. The reserve requirement ratio, the amount of reserves lenders must hold, will be cut by 0.5 percentage points, while signalling a further potential cut of 0.25 to 0.5 percentage points this year. The RRR cut would add Rmb1tn ($142bn) in liquidity to the banking system.

Goldman Sachs said in a note the “rare simultaneous cut of policy rates and RRR, the relatively large magnitude of cuts and the unusual guidance on further policy easing indicated policymakers’ growing concerns over growth headwinds”. However, economists said that with loan demand muted among households, more direct government fiscal spending would probably be needed to improve the growth outlook.

China’s economic growth has decelerated in recent months as a prolonged slowdown in the property sector weighs on consumer sentiment. Economists have slashed their growth forecasts to less than the government’s official target of about 5% for 2024 as deflationary forces have persisted, with producer prices declining since last year.

Robust shipments of electric vehicles, batteries, and other goods have not fully offset the weaker domestic economy. The PBoC’s cuts came after the US Federal Reserve last week cut its benchmark interest rate by half a percentage point.
China’s stimulus package offers a glimmer of hope for economic recovery. While the road ahead may be challenging, the government’s commitment to supporting growth and stability is evident. The success of these measures will ultimately determine the trajectory of China’s economy and its global influence.