China's Central Bank Unveils Bold Measures to Combat Economic Slump
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China's Central Bank Unveils Bold Measures to Combat Economic Slump

Global Economy
china
pboc
economicstimulus
interestrates
globaleconomy
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Summary:

  • China's central bank cuts RRR by 50 basis points to stimulate the economy.

  • 7-day repo rate reduced by 0.2 percentage points to support borrowing.

  • Further cuts in the loan prime rate may follow, impacting mortgages and loans.

  • Plans to support the property market include extending measures and lowering mortgage rates.

  • Concerns raised about the lack of fiscal stimulus, which is critical for growth.

China's Economic Strategy

BEIJING — The People's Bank of China (PBOC) has announced a significant cut in the reserve requirement ratio (RRR) by 50 basis points as part of its efforts to stimulate the economy. Governor Pan Gongsheng made this announcement during a press conference, emphasizing that the cut will take place in the near term.

Pan Gongsheng, Governor of the People’s Bank of China

Pan indicated that there could be an additional cut of 0.25 to 0.5 basis points by the end of the year, depending on market conditions. He also announced a reduction in the 7-day repo rate by 0.2 percentage points.

Economic Impact
Lynn Song, chief economist for greater China at ING, described the repo rate cut as “the most important” aspect of the conference, suggesting that markets had anticipated smaller cuts. He noted that the RRR cut aims to boost market sentiment, as the real issue lies more with limited borrowing demand rather than banks lacking funds.

Pan also hinted at a possible cut in the loan prime rate, which influences corporate and household loans, including mortgages.

Support for the Property Market
During the conference, plans to support the struggling property market were also outlined, including extending measures for an additional two years and reducing interest rates on existing mortgages. The 10-year government bond yield recently hit a record low of 2%, reflecting the current economic climate.

The press conference was notably scheduled following the U.S. Federal Reserve's recent interest rate cut, providing China’s central bank with more flexibility to implement its own rate cuts amidst ongoing deflationary pressures.

Limited Fiscal Support
Despite these measures, economists have expressed concerns about the lack of fiscal stimulus from the Chinese government, which is crucial for driving growth. Analysts from Goldman Sachs highlighted that recent local government bond issuances are primarily addressing budget deficits rather than fostering new growth.

Pan's leadership at the PBOC, which began in July 2023, has been marked by calls for more aggressive fiscal measures to tackle the economic slowdown exacerbated by the real estate slump and low consumer confidence.

Conclusion
While the PBOC is taking steps to stimulate the economy, the consensus among economists suggests that a more coordinated fiscal approach is necessary to achieve sustainable growth moving forward.

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