In a dramatic move to revitalize its stuttering economy, China’s central bank has unleashed a wave of stimulus, slashing interest rates and injecting a massive amount of liquidity into the banking system. This move, coupled with the government’s planned massive fiscal stimulus package, signals a last-ditch effort to pull economic growth back towards this year’s target of around 5%.
The urgency behind these measures stems from a combination of mounting economic headwinds, a sharp downturn in the property market, and faltering consumer confidence. These factors have exposed the over-reliance of the world’s second-largest economy on exports in an increasingly tense global trade environment.
Recent economic data has painted a bleak picture, with a wide range of indicators missing forecasts and raising concerns among economists that the growth target was at risk. In August, industrial profits swung back to a sharp contraction, further fueling these concerns. The Politburo, the top decision-making body of the Communist Party, has acknowledged the gravity of the situation and expressed a heightened sense of urgency in the face of these challenges.
The central bank’s move on Friday involved a 50 basis point reduction in the reserve requirement ratio (RRR), the second such cut this year. This measure is expected to release 1 trillion yuan ($142.5 billion) into the banking system, boosting liquidity. Additionally, the benchmark interest rate on seven-day reverse repurchase agreements was cut by 20 basis points to 1.50 percent, taking effect immediately. Governor Pan Gongsheng, in an unusual move, hinted at the possibility of another RRR reduction later this year.
While the central bank’s actions are significant, investors are keenly focused on the fiscal measures that are expected to be announced in the coming days. These measures are anticipated to include a 1 trillion yuan issuance of special sovereign bonds, earmarked for a range of initiatives including subsidies for consumer goods replacement programs, upgrades for large-scale business equipment, and a monthly allowance of 800 yuan ($114) per child for families with two or more children. Additionally, China is planning to raise another 1 trillion yuan through separate special sovereign debt issuance to help local governments address their debt problems.
The looming fiscal measures signify a shift towards stimulating consumption, a direction Beijing has long espoused but has made little progress on. China’s household spending currently accounts for less than 40 percent of annual economic output, significantly lower than the global average. By contrast, investment accounts for 20 points above the average but has been fueling more debt than growth.
The Politburo has also pledged to stabilize the troubled real estate market, announcing plans to expand a white list of housing projects eligible for financing and revitalize idle land. The timing of the September meeting, which is not typically used to discuss economic matters, highlights the growing anxiety among officials about the economic situation.
While the ‘shock and awe’ strategy of stimulus may be aimed at jumpstarting the markets and boosting confidence, analysts emphasize the need for well-considered policies to address the deep-rooted problems, particularly in the critical real estate sector. Ultimately, the success of these measures in reviving the economy hinges on China’s ability to navigate the challenges and find lasting solutions.
