China’s central bank has unveiled a broad package of monetary stimulus measures designed to revive the world’s second-largest economy, which is currently facing insufficient factors for an upward trajectory that ensures rapid growth.
The media note that the mentioned set of solutions can be interpreted as evidence that now, in the internal moods of the government of the head of the People’s Republic of China Xi Jinping, excitement about the economic prospects of the Asian country is spreading and becoming more significant. In the relevant context, it is worth mentioning that Beijing has recently been faced with the obvious problem of falling investor confidence. The Chinese government is also aware that the pace of the current economic growth is insufficient for a full recovery after a very difficult period of the coronavirus pandemic and against the background of a prolonged crisis in the local real estate sector, which is beginning to show signs of what can be described as a kind of fundamental condition, and is a factor of large-scale impact beyond the area of property.
People’s Bank of China governor Pan Gongsheng cut a key short-term interest rate. He made the corresponding statement during a briefing in Beijing. Also, the head of the central bank of the Asian country announced plans to reduce the amount of funds that banks must hold in reserves. According to him, the corresponding indicator will be decreased to at least the lowest level in the last six years. In this context, he clarified that the lowering would be 50 basis points shortly. The corresponding decision is expected to free up about 1 trillion yuan ($142 billion) for new lending. Pan Gongsheng also stated that the mentioned indicator could be reduced by another 0.25-0.5 percentage points. The relevant prospects depend on the liquidity situation in the market.
Against the background of statements of intent by the central bank of China, the value of local stocks and bonds showed growth. It is also worth noting that these statements in a symbolic sense have become what can be called a fresh wind for the stock market of an Asian country, where there has recently been a lack of significant upward dynamic. The yuan exchange rate jumped to a 16-month high against the dollar amid the specified news. China’s benchmark CSI 300 Index of shares ended the session 4.3% higher, close to erasing losses for the year. At the same time, this figure is still lower by more than 40% compared to the maximum recorded in 2021. The yield on the Asian country’s 10-year bonds rose by 3 basis points to 2.06%.
The head of the central bank of China also presented a package of measures aimed at improving the situation in the real estate market, which is a source of a kind of restraining effect on the growth potential of the world’s second-largest economy. As part of the relevant set of solutions, the most important is lowering the cost of borrowing on mortgages by up to $5.3 trillion and adjusting the rules for buying a second home towards easing.
Pan Gongsheng, speaking about the planned incentives for the nation’s stocks, said that the central bank of the Asian country will provide liquidity support for at least $113 billion. Also in the relevant context, he noted that officials are currently studying the possibility of setting up a market stabilization fund.
It’s worth noting that the announced measures to revive the world’s second-largest economy did not become an absolute sensation or a decision by Beijing that could not have been predicted. For a long period, the opinion has been actively circulating among experts that the Chinese authorities need to take more decisive and large-scale measures aimed at ensuring economic growth, which currently exists, but already demonstrates the downward dynamic and is not sufficient to restore the indicators lost in recent years. In the first quarter of 2024, the Asian country’s economy grew by 5.3% year-on-year. In the second quarter of the current year, the rise of the corresponding indicator slowed to 4.7%. At the same time, Beijing’s goal is to grow the economy by about 5% in 2024. It’s worth noting that some experts have worsened their forecasts regarding the dynamic of this indicator. For example, analysts at Goldman Sachs and Citigroup expect the world’s second-largest economy to grow by 4.7% this year. At the same time, Goldman Sachs experts initially predicted that the corresponding indicator would rise by 4.9% in 2024. Also, the previous version of the forecast by Citigroup analysts provided for the growth of the world’s second-largest economy by 4.8% in the current year.
It is worth noting that so far there are no guarantees that the announced measures to stimulate China’s economic system, based on the results of implementation in the space of material reality, will generate the result that Beijing expects to see. It should not be excluded that these decisions will not be sufficient to fully overcome the long-term deflationary pressure in the Asian country and positively transform the situation in the local real estate market.
Some experts say that Beijing may face the need to take more drastic measures to stimulate the world’s second-largest economy. In this case, priority is given to solutions to activate consumer demand, which, according to many analysts, needs boosting.
Ken Wong, Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd., stated that it’s hard to say what silver bullet can help resolve everything. The expert positively characterized the fact that monetary policy easing measures are accommodative, but noted that Beijing needs to do even more to help strengthen economic growth in the fourth quarter of the current year.
It is worth noting that for a long period, the Chinese authorities have been trying to revive the economy, avoiding powerful stimulus measures. This practice actually provided for disparate decisions and actions that did not generate significant results.
Larry Hu, head of China economics at Macquarie Group Ltd., suggests that the purpose of the above-mentioned briefing held in Beijing is to inject confidence into the market. The expert substantiates this assumption by the fact that the authorities have revealed incentive measures in one go.
It’s worth mentioning that last week, the Federal Reserve decided to cut interest rates by a half-percentage point. This measure turned out to be more scale and decisive than the preliminary expectations regarding monetary policy easing by the financial regulator of the United States. The corresponding decision of the Fed for the central banks of Asian countries means more room for maneuver. At the same time, cheaper money will not be a factor in stimulating China’s economic growth unless local consumers begin to follow the line of behavior within the framework of the concept of more active spending.
The media notes that China is approaching a kind of wave of layoffs associated with a decrease in corporate profits. Also, real estate prices continue to fall in the Asian country, which is not a positive factor given the negative situation in the relevant market.
Christopher Beddor, deputy China research director at Gavekal Dragonomics, stated that the question now is whether the announced measures are a prelude to making more substantial decisions.
