China Boosts Its Economy with New Monetary Strategies

(BEIJING) - The People's Bank of China unveiled a set of broad monetary stimulus strategies and support measures for the real estate sector aimed at revitalizing the economy, which is currently facing serious deflationary pressures and risks not meeting its growth target this year. During a news conference, Governor Pan Gongsheng, along with other senior officials from regulatory financial entities, announced a 50 basis point cut in the reserve requirement ratio (RRR), which is the amount of cash banks must hold in reserve.

Additionally, the People's Bank of China will lower the interest rate on seven-day reverse repos by 0.2 percentage points, bringing it down to 1.5%. Rates on deposits and other interest modalities will also be reduced. Interest rates on existing mortgages will be cut by about 0.5 percentage points, a move that could provide relief to households yet raise concerns about the profitability of banking institutions. Pan did not specify when these measures will take effect. In the second quarter, China's economic growth was much lower than expected, impacted by a prolonged real estate crisis and labor market uncertainties that have paralyzed consumer confidence. Economic indicators for August generally fell short of expectations, making the implementation of new support measures an urgent matter. "This action might come a bit late, but better late than never," commented Gary Ng, chief economist at Natixis. "With a high real interest rate, low morale, and no increase in the real estate sector, China needs a lower interest rate environment to restore confidence." The government aims for near 5.0% economic growth for 2024; however, several investment institutions, including Goldman Sachs, Nomura, UBS, and Bank of America, have recently downgraded their growth forecasts for this year. The .CSI300 and .SSEC indexes showed gains, and the domestic yuan CNY=CFXS opened at its highest level since May 2023. The yield on China's benchmark 10-year government bond CN10YT=RR fell by 4 basis points to 2.036%, close to the historical low reached last week, while 30-year Treasury futures for December CTLC1 reached an all-time high. Pan indicated that further monetary policy easing is expected, including another cut in the benchmark interest rates before the year ends. China's recent monetary measures come after the U.S. Federal Reserve made a significant interest rate cut last week, which allowed many analysts to see greater leeway for the People's Bank of China to loosen monetary conditions without putting too much pressure on the yuan.

Comment: The measures taken by the People's Bank of China seem necessary to sustain growth amid a complicated landscape. In terms of global finances, this could trigger a domino effect on other economies, especially in countries with close trade relations to China. Additionally, it is crucial that these policies succeed in restoring confidence both in the financial sector and the real estate market to avoid a prolonged impact on economic growth. Maintaining a flexible monetary policy could be a key tool during these uncertain times.