Since the COVID-19 crisis, the Chinese economy has faced several challenges, primarily due to weak consumer confidence and an ongoing property market crisis. In an effort to restore the high economic growth that characterized much of the 21st century, the People’s Bank of China (PBoC) has unveiled a “bazooka” stimulus package aimed at revitalizing growth, boosting consumption, and stabilizing financial markets through monetary policy easing. In this week’s blog, we will break down China’s latest economic intervention and analyze whether these measures will be sufficient to achieve their intended goals.
Overview of the Stimulus Package
On September 24th, the People’s Bank of China announced a range of measures, including monetary stimulus, property market support, and initiatives to strengthen the capital market, aimed at boosting economic growth and restoring consumer and investor confidence. Key actions include policy rate cuts, reductions in the reserve requirement ratio (RRR), mortgage rate adjustments, and liquidity injections. These measures, described as bold by historical standards, represent China’s most significant economic intervention since the early pandemic days, highlighting the severity of the current challenges.
Monetary stimulus measures
To boost lending and economic activity, Pan Gongsheng, governor of the PBoC, announced a reduction of the RRR by 0.5 p.p. in the near future, providing approximately 1 trillion yuan (c. EUR 129 billion) in long-term liquidity. The RRR cut lowers the amount of cash banks must hold in reserve, freeing up more capital for lending. Additionally, the policy rate for seven-day reverse repurchase agreements will be reduced by 2 p.p., from 1.7% to 1.5%, aimed at reducing borrowing costs for businesses and individuals.
These measures signal China’s commitment to maintaining an accommodative monetary policy. However, some argue that weak credit demand may limit their impact, as businesses and consumers remain hesitant to take on new debt amid economic uncertainty. Moreover, China’s ability to lower rates aggressively is influenced by global factors, such as recent FED cuts which allowed it to ease its own rates without putting excessive pressure on the yuan.
China’s interest rate levels (2020 – 2024 YTD, %)
Source: Bloomberg, InterCapital Research
Mortgage rate cuts
China’s troubled real estate market, which constitutes 70% of household savings and one-fifth of GDP, remains a significant economic issue. Lowering mortgage rates on existing home loans to match new loans is expected to benefit 50 million households, saving approximately 150 billion yuan (c. EUR 19bn) annually. Additionally, the minimum down payment ratio for second homes will be reduced from 25% to 15%, unifying it with the minimum down payment ratio for first homes. The PBoC also announced the establishment of a 300-billion-yuan (c. EUR 39bn) re-lending facility to support local state-owned enterprises in buying commercial homes for affordable housing, increasing the funding proportion from 60% to 100%.
Despite these measures, declining home prices and high developer debt have discouraged investment, as potential buyers expect further price drops. Although the mentioned actions may provide short-term relief, fundamental issues such as slowing population growth and demographic shifts will require deeper and more structural reforms to address effectively. Of course, weakened consumer and investor confidence persists, hindering even short-term improvements in the housing market.
Residential Property Price growth rate in China (quarterly growth rate in %, 2010=100)
Source: Bank for International Settlements, InterCapital Research
Financial market support
Moreover, the PBoC will introduce new monetary tools to support the stock market, including a swap program for securities, funds, and insurance companies to obtain liquidity through asset collateralization. This initiative aims to help these institutions increase their stock holdings. Additionally, a re-lending facility will guide banks in providing loans to listed companies for stock buybacks. The Central Bank also plans to increase the tier-1 capital of six major commercial banks, enhancing their resilience and lending capacity to strengthen market confidence. Furthermore, new measures to encourage mergers and acquisitions are said to be unveiled soon.
These measures, with at least 500 billion yuan (c. EUR 65bn) of liquidity support, have been positively received, with the Shanghai Composite Index rising by over 4% after the PBoC announcement and gaining around 20% over the past two weeks, while the 10-year yield on Chinese bonds fell to 2% for the first time on record. However, doubts remain about the effectiveness of the stimulus and the ability to restore lasting investor confidence. Regulatory uncertainty and increased government intervention have hurt market sentiment, leading foreign investors to reduce exposure to Chinese assets, while domestic investors have shifted to safer investments like bonds or aforementioned real estate.
Shanghai Composite Index performance (2020 – 2024 YTD, points)
Source: Bloomberg, InterCapital Research
Conclusion
To sum up, China’s latest stimulus package has provided a temporary boost to financial markets and demonstrated the government’s commitment to revitalizing economic growth. However, the sustainability of these positive effects remains uncertain, especially given the ongoing challenges in the real estate sector and weakened consumer and investor confidence. To achieve a sustained economic recovery, China will likely need to go beyond monetary interventions and address structural issues through comprehensive fiscal policies aimed at boosting consumption and investment. Additionally, fostering a stable and predictable regulatory environment will be crucial in restoring both domestic and international business confidence.
Ultimately, the success of this stimulus package will depend on its ability to significantly restore consumer confidence and stimulate household spending. Without a marked increase in consumption, China’s broader economic recovery and targeted GDP growth of 5% in 2024 could remain elusive. The coming months will be critical in determining whether the current measures will suffice or if more aggressive policy actions will be required to reignite growth and sustain momentum in the world’s second-largest economy.
