China central bank releases slate of support measures amid a deepening economic slump

BEIJING — China will cut the amount of cash banks need to have on hand, known as the reserve requirement ratio or RRR, by 50 basis points, People’s Bank of China Gov. Pan Gongsheng said during a news conference on Tuesday.

Pan, who was speaking to reporters alongside two other financial regulator heads, did not indicate exactly when the central bank will ease the policy but said it would be in the near term. Depending on conditions, there may be another cut of 0.25 to 0.5 basis points by the end of the year, Pan added.

He also said the PBOC would cut the 7-day repo rate by 0.2 percentage points.

Lynn Song, chief economist for greater China ING, called the repo rate cut announcement “the most important” move made during the news conference.

“Markets had been leaning toward expecting multiple 10bp rate cuts, so a 20bp cut represents a slightly stronger than expected move,” he said in a note on Tuesday. “However, the net impact will depend on whether we see further cuts ahead or whether the PBOC falls into a wait-and-see mindset after today’s policy package.”

The RRR cut was more a move to boost sentiment, since the challenge is not banks lacking the funds to lend, but limited demand for borrowing, Song added.

Later in the news conference, Pan signaled that a 0.2-0.25% cut in the loan prime rate could follow, without specifying when or if he was referring to the one-year or five-year LPR. Last Friday, the PBOC kept its main benchmark lending rates unchanged at the monthly fixing. The LPR affects corporate and household loans, including mortgages.

Pan also outlined plans to further support the struggling property market, including extending measures for two years and cutting the interest rates on existing mortgages.

The official policy announcements will be published on the central bank’s website, Pan added, without specifying exactly when.

China’s 10-year government bond yield hit a record low of 2% amid Pan’s lengthy address.

The rare high-level news conference was scheduled after the U.S. Federal Reserve cut interest rates last week. That kicked off an easing cycle that gave China’s central bank further room to cut its rates and boost growth in the face of deflationary pressure.

“We feel today’s measures are a step in the right direction, especially as multiple measures have been announced together, rather than spacing out individual piecemeal measures to a more limited effect,” ING’s Song said.

“We continue to believe that there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory,” he said. “If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.”

Pan became PBOC governor in July 2023. During his first news conference as central bank governor in January, Pan said the PBOC would cut the reserve requirement ratio. Policy announcements are rarely made during such events, and are typically disseminated through online releases and state media.

He then told reporters in March, alongside China’s annual parliamentary meeting, that there was room to cut the RRR further, meaning a reduction had been widely expected for months.

Unlike the Fed’s focus on a main interest rate, the PBOC uses a variety of rates to manage monetary policy. China’s government system also means that policy is set at a far higher level than that of the financial regulators who spoke Tuesday. During top-level meetings in July, there had been calls for efforts to reach full-year growth targets and to boost domestic demand.

While the PBOC had kept the loan prime rate unchanged two days after the Fed’s cut, it did move Monday to lower a short-term rate, which determines the supply of money. The PBOC lowered the 14-day reverse repo rate by 10 basis points to 1.85%, but did not reduce the 7-day reverse repo rate, which was cut in July to 1.7%. Pan has indicated he would like the 7-day rate to become the main policy rate.

Limited fiscal support

China’s economic growth has slowed, dragged down by the real estate slump and low consumer confidence. Economists have called for more stimulus, especially on the fiscal front.

“We are surprised by a lack of fiscal stimulus even though they seem very willing to deploy monetary policy stimulus now,” Edmund Goh, head of China fixed income at abrdn, said in an email Tuesday. “It just seems like PBOC has a more accurate read on the situation of the economy but they are unable to convince the central government to implement a bigger fiscal deficit.”

An analysis by Goldman Sachs this month indicated that recent local government bond issuance was going more toward addressing budget shortfalls rather than supporting additional growth. The real estate slump has cut into land sales, once a major source of local government revenue.

Li Yunze, minister of the National Financial Regulatory Administration, said at Tuesday’s news conference that the slowdown of property market sales has made it difficult for real estate companies to deliver houses on schedule.

The administration, which expands upon the banking regulator’s responsibilities, was created last year as part of Beijing’s overhaul of its financial regulatory system.

In January, China launched a whitelist for determining which real estate projects to support first. Li said that more than 5,700 such projects have been approved, with financing totaling 1.43 trillion yuan ($200 billion). That has allowed more than 4 million homes to be completed, he said.

Still, the gap remains large. Nomura estimated late last year that about 20 million houses in China had been pre-sold but not completed and delivered to buyers.