China’s central bank, the People’s Bank of China (PBOC), announced on Tuesday a significant economic stimulus plan aimed at addressing the country’s ongoing deflationary challenges and supporting growth targets.
This initiative marks the most extensive stimulus effort since the pandemic began, with analysts suggesting additional fiscal measures will be necessary to restore economic confidence.
Governor Pan Gongsheng revealed plans to cut the reserve requirement ratio (RRR) for banks by 50 basis points, which is expected to free up approximately 1 trillion yuan (around $142 billion) for lending. The central bank will also reduce the seven-day reverse repo rate by 0.2 percentage points, bringing it to 1.5%. Other interest rates will also see reductions, providing potential relief to borrowers.
“This is the most significant PBOC stimulus package since the early days of the pandemic,” said Julian Evans-Pritchard, an analyst at Capital Economics.
However, he emphasized that these measures alone may not suffice to return growth to the government’s target of approximately 5% for this year.
The stimulus comes in response to a slew of disappointing economic data, which raised concerns about a prolonged structural slowdown in the world’s second-largest economy. Chinese stocks rallied following the announcement, with the yuan reaching a 16-month high against the dollar.
In addition to liquidity injections, the stimulus package aims to provide support for the struggling property market. Measures include reducing interest rates for existing mortgages and lowering the minimum down payment requirement to 15% for all types of homes. Despite these efforts, the property sector has been in decline since its peak in 2021, with developers facing defaults and significant unsold inventory.
The announcement follows an investigation into the effectiveness of China’s existing economic policies and the urgent need for enhanced fiscal stimulus. Analysts have noted that without stronger fiscal support, the recent monetary measures may have limited impact, particularly in a climate of weak credit demand from consumers and businesses.
Moreover, local governments have been ramping up bond issuances to fund infrastructure projects, but many experts argue that more aggressive fiscal policies are needed to stimulate genuine economic demand.
“An aggressive fiscal policy is required to inject genuine economic demand… [PBOC’s actions is] far from being a bazooka,” stated analysts from ANZ.
The central bank’s initiatives also coincide with recent actions by the US Federal Reserve, which has lowered interest rates, providing China with additional room to adjust its monetary policy without significantly impacting the yuan’s stability.
Reuters, the Guardian, and Al Jazeera contributed to this report.
