In a bid to address the deepening economic slump, the People’s Bank of China (PBOC) announced significant support measures during a press conference on Tuesday, led by Governor Pan Gongsheng. The central bank revealed plans to cut the reserve requirement ratio (RRR) for banks by 50 basis points, aiming to increase liquidity within the financial system. While Pan did not specify an exact timeline for this policy easing, he indicated it would occur in the near term, with potential additional cuts of 0.25 to 0.5 basis points by the year’s end.
In a notable move, the PBOC also decided to lower the 7-day repo rate by 0.2 percentage points, a decision that chief economist for Greater China at ING, Lynn Song, deemed as the most crucial development during the press conference. He noted that while markets anticipated multiple smaller cuts, this larger reduction reflects a stronger-than-expected approach. However, he cautioned that the overall impact would depend on whether the PBOC opts for further cuts or adopts a more cautious stance after this announcement.
Pan emphasized that the RRR cut is intended primarily to boost market sentiment rather than to address an acute shortage of lending funds, as demand for borrowing remains limited. During the conference, he also hinted at a potential reduction in the loan prime rate, crucial for corporate and household loans, though he did not clarify the specifics of such cuts.
Further, Pan outlined measures to support the struggling property market, extending support initiatives for an additional two years and proposing cuts to interest rates on existing mortgages. These announcements come as China faces significant economic challenges, including a slowing growth rate exacerbated by a slump in the real estate sector and waning consumer confidence.
In a reflection of these economic pressures, China’s 10-year government bond yield recently fell to a record low of 2%. The PBOC’s actions were partly influenced by the U.S. Federal Reserve’s recent interest rate cuts, which have opened up more room for China to adjust its monetary policy to stimulate growth amid deflationary concerns.
While the PBOC has initiated these monetary policy adjustments, experts note that the absence of significant fiscal stimulus is concerning. Analysts, including Edmund Goh from abrdn, expressed surprise at the lack of government support despite the central bank’s readiness to employ monetary strategies. The ongoing real estate crisis, which has severely impacted local government revenues, further complicates the economic landscape, underscoring the necessity for comprehensive fiscal measures to stabilize growth.
