The People’s Bank of China announced on Thursday that it will cut the reserve ratio for banks by 0.5 percentage points, to 10% for the largest banks. PBOC will also lower the interest rate on some of its targeted relending programs such as support for small businesses. Those announcements came at a press conference by PBOC Governor Pan Gongsheng intended to firm up confidence after the poor start to the equity market in 2024.
The PBOC’s moves do not imply a wholesale shift in China’s stimulus strategy – it is not the “bazooka,” nor should one expect that to come. As an indicator of incremental support it is a positive sign of the PBOC’s intent to support growth, but the confidence effect may be short-lived if additional measures underwhelm.
The timing of the move is not a complete surprise. Many analysts and investors had expected an RRR cut sometime in Q1, and a PBOC official had further stoked speculation with hints during an interview on January 9.
The most notable aspect was the size. This is the first 50 basis point cut to RRRs since 2021, with the PBOC opting more recently for 25 basis point cuts.
The larger-than-expected move, announced by Governor Pan personally, is an effort to show that PBOC is not passive in supporting the economy – and this is partly an exercise in damage control. PBOC had in its own way contributed to the recent market sell-off by holding key policy rates (the MLF and LPR) rather than lowering them as many in the market had been expecting.
Pan and colleagues did not make other major announcements during the press conference but the broader tone also leaned dovish, with an emphasis on supporting credit growth and facilitating a strong start to 2024. Pan commented that the expectation of Fed rate cuts will provide PBOC more space for monetary easing this year. He noted that China’s price level and expectations remain below the target, a nod to PBOC becoming more vigilant on deflation risks.
When it comes to spurring demand in the real economy, the RRR cut will have limited effectiveness on its own. The PBOC’s move releases significant liquidity to banks (CNY 1 trillion according to Bloomberg’s estimate), which will help banks extend support for infrastructure and affordable housing projects this year. But the effectiveness of such liquidity support is constrained amid a climate of weak private sector demand for credit. Credit data in December showed that the increase in lending was driven largely by government bond issuance rather than increased appetite for loans by firms and households.
Reviving growth and confidence will require further actions on the part of PBOC and other agencies. Key watchpoints include:
- Rate cuts to bring down real interest rates, which remain high amid deflation
- Further news as to how the PBOC will use its PSL facility to support infrastructure and affordable housing construction this year. Pan did not discuss the issue in detail, suggesting PBOC and other agencies are still debating the modalities
- The strength of fiscal policy, including the size of the broad budget deficit and central government support for infrastructure funding (such as through a special sovereign bond offering or similar tools) amid debt headwinds for local governments
- Further incremental easing in the property sector
The actions above are all expected, but with key outstanding questions as to their size, timing and scope. There will be more signals in the weeks ahead, leading up to the start of the National People’s Congress on March 5.
How effective will Beijing’s anticipated measures be in supporting Chinese equities? Beijing’s stimulus strategy remains focused on boosting investment, namely in infrastructure, affordable housing, and various sectors of advanced manufacturing such as EVs and other clean tech. This approach should succeed in at least mechanically putting a floor on GDP growth of 4-4.5% this year, and defraying concerns – which are overdone – that China’s economy faces a crisis or potential hard landing. The key limitation is that relative to a consumption-focused stimulus strategy (which is not in the cards), state-directed investment does more to boost supply than underlying demand, particularly in the household sector. Subdued final demand will make it harder for China to break out of decisively break out of deflation, which is constraining corporate revenue and profit growth and will remain an important factor weighing on Chinese equities.
