At Tricio we have been worried about the soft economic growth seen in China since the pandemic, with special attention paid to property sector woes which are impacting sentiment and growth, and the lack of a big stimulus package from the government. The latter may be changing as China announced a series of stimulus programmes on Tuesday aimed at stimulating growth. People’s Bank of China Governor Pan announced that the reserve requirement ratio (RRR) will be lowered by 50 bp (from 10% to 9.5%) which should free up around 1 trillion yuan for lending. Governor Pan suggested that the RRR may be lowered by another 50 bp to 25 bp later this year, depending on liquidity conditions. The PBOC lowered the RRR by 50 bp from 10.5% to 10% earlier in the year. The PBOC announced that the seven-day reverse repo rate (which they are trying to set as their benchmark rate) would be lowered by 0.2% to 1.5%, and that they expect this to lead to a drop in the medium-term lending facility rate (MLF) and the loan prime rate (LPR).
To help address the soft property market directly, the PBOC will work with commercial banks to lower the rates on existing mortgages by 0.5% on average. The minimum down payment ratio will be reduced to 15% for second-home buyers from 25%. To help stock market investors, measures to promote mergers, acquisitions and reorganizations will be introduced. A swap programme with an initial size of 500 billion yuan will provide funds, insurers and brokers with easier funding to buy stocks. The PBOC will also provide 300 billion yuan of loans to commercial banks to fund listed companies share purchases and buybacks.
Initial reaction
Stock markets liked the announcement, with a lot of investor attention paid to the fact that the PBOC Governor was making a relatively rare public announcement of the policy changes. It is very much ‘early days’ to see if these measures will reverse sentiment on a long-term basis of course, but the initial reaction saw Chinese shares (mainland and HK) rise over 4%.
Our assessment
These are important measures which should give some stimulus to the economy and help support stock prices. They have been made possible, or at least, less risky, for the authorities because of the large Fed rate cut and the sharp bounce in the yen over the summer. The authorities were nervous about monetary ease earlier because of the risk of losing control of the renminbi. With the yen up about 10% vs the dollar since early July and the renminbi up about 5%, that risk has fallen. Also, the improved competitiveness of the renminbi will help exports at the margin. Further Chinese monetary easing is planned but will depend on the Fed continuing to cut and the renminbi staying well-supported.
However, when confidence is low enough, rate cuts have limited impact. This is the so-called ‘liquidity trap’ when monetary policy is like pushing on a string. The stock market cheered the extra government-supported buying and its bounce Tuesday was doubtless helped by the fact that, as of Monday it had returned to the lows seen last February. But the package announced today will not be enough to really turn the Chinese economy around. That is only likely when the property slump has fully reached bottom which still seems a little way away.
One problem is that price controls on new flats, which forbid price cuts, have prevented developers from clearing inventory. Those controls have been eased recently but there will be a period of pain first as developers accept much lower prices while existing owners of flats fully recognise the losses they have made. It seems likely to take a while before the property sector finds the bottom and confidence can settle down. Meanwhile the authorities still face the problem that many small and medium-sized banks are under stress given the weakness in asset prices and the defaults by developers.
One thing Tuesday’s package underlines is that, once again, the authorities are avoiding any major fiscal stimulus to try to boost the economy. Many commentators have been calling for this. However, in our view, a major fiscal stimulus is simply not possible because there is already too much debt in the public sector when the dire position of many local governments and their financing vehicles is taken into account.
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