A Comprehensive Stimulus Package

In an unprecedented move aimed at invigorating China's weakening economy and reviving a sluggish stock market, the People's Bank of China (PBOC) has rolled out a comprehensive set of policy measures. This aggressive action comes in response to a series of concerning economic indicators, including faltering job growth, subdued consumer spending, and declining inflation.

  • The PBOC announced a raft of measures to address these issues, including cutting its benchmark interest rate and reducing the reserve requirement ratio for banks, enabling them to lend more freely.
  • Mortgage rates will be lowered for existing loans, and the minimum down payment for second homes will be reduced, signaling a push to revive the real estate sector.
  • Perhaps the most striking component of the package is a 500 billion yuan (approximately $70 billion) loan aimed at boosting the country’s stock market.
  • This liquidity will flow to funds, brokers, and insurers, with the goal of spurring stock purchases and lifting market sentiment. An additional 300 billion yuan has been earmarked to support share buybacks by listed companies.

The PBOC’s actions reflect growing anxiety within Beijing about the economic outlook, as it faces growing challenges in maintaining its growth target of around 5% for the year. Recent data, including weak summer activity, has led investment banks such as Goldman Sachs and UBS to cut their growth forecasts below this target.

Short-Term Relief, But Structural Issues Persist

The PBOC’s moves were met with an immediate response from the stock market. China’s CSI 300 index rose 2.4%, and Hong Kong’s benchmark surged 3.3% following the announcement. However, the CSI 300 remains down 4.1% year-to-date and has lost about a third of its value since 2021. While the central bank's intervention buoyed investor confidence, questions remain about its long-term impact on China’s economic health.

  • Still, economists argue that deeper, structural reforms are necessary, particularly in the real estate sector, which remains China's largest economic challenge.
  • China’s real estate crisis has wiped out an estimated $18 trillion in household wealth since 2021, severely undermining consumer confidence. Barclays estimates that this is equivalent to roughly $60,000 per family.

As a result, consumer spending remains depressed, despite low interest rates. To restore economic momentum, economists suggest that Beijing must take more aggressive steps to allow home prices to adjust downward and address the enormous backlog of unfinished housing projects.

A Global Context

The PBOC's aggressive actions come in the wake of a move by the U.S. Federal Reserve to lower interest rates, providing a momentary reprieve for China as it seeks to prevent capital flight and stabilize its currency. Raymond Yeung, chief economist for Greater China at ANZ, noted that the Fed cut has opened the door for more frequent monetary easing in China. Yet, despite the broad range of measures, many households and businesses remain reluctant to borrow.

  • The credit data suggests a broader lack of confidence in the economy, with unemployment and falling real estate values weighing heavily on sentiment. The inability to refinance mortgages, unlike in Western economies, further limits the effectiveness of rate cuts.
  • Economists argue that while monetary easing provides short-term liquidity, a more robust fiscal response is needed to drive long-term growth.
  • Weakening economic activity has eaten into tax revenues, leaving local governments unable to spend their borrowing quotas on viable infrastructure projects.
  • To stimulate growth and inflation, economists are calling on the central government to take on more debt and loosen restrictions on local government borrowing to boost consumption.
  • In the meantime, the PBOC’s immediate goal is to shore up confidence in the financial markets and prevent further deterioration in economic activity. PBOC Governor Pan Gongsheng indicated that further easing measures, including another reduction in reserve requirements, are likely before the end of the year.

However, as the real estate crisis continues to fester and consumer confidence remains low, the long-term effectiveness of these measures remains uncertain. Many observers believe that while the PBOC’s intervention will provide temporary relief, the road to sustainable recovery requires addressing China’s deep-rooted structural issues, particularly in housing and consumption. Without more aggressive reforms, China's economic recovery may be slow and halting.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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