China's central bank issues list of supportive measures amid deepening economic recession

BEIJING – China will cut the amount of cash banks must keep on hand, known as the reserve requirement ratio or RRR, by 50 basis points, People's Bank of China Governor Pan Gongsheng said at a press conference on Tuesday.

Ban, who was speaking to reporters alongside two other financial regulators, did not indicate when exactly the central bank might ease rates, but said it would be in the near term. Depending on circumstances, there could be another cut of 0.25 to 0.5 basis points by the end of the year, Ban added.

He also said the People's Bank of China will cut the seven-day repo rate by 0.2 percentage points.

Lin Song, chief economist at ING Bank of China, described the announcement of the repo rate cut as the “most important step” taken during the press conference.

“Markets have been pricing in multiple 10bp rate cuts, so a 20bp cut is a slightly stronger move than expected,” he said in a note on Tuesday. “However, the net impact will depend on whether we see more cuts in the future or whether the PBOC moves into a wait-and-see mentality after today’s policy package.”

Song added that cutting the cash reserve ratio was a move to boost sentiment, because the challenge is not that banks lack the funds to lend, but rather that demand for borrowing is limited.

Later in the press conference, Pan indicated that a 0.2-0.25 percentage point cut in the benchmark lending rate could follow, without specifying when or whether he was referring to the one-year or five-year benchmark rate. Last Friday, the People’s Bank of China left its key benchmark lending rates unchanged at a monthly fixing. The benchmark lending rate affects corporate and household loans, including mortgages.

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

Ban added that official policy announcements will be posted on the central bank's website, without specifying a specific date.

The yield on China's 10-year government bonds hit an all-time low of 2% amid Ban's lengthy speech.

The rare high-level press conference was scheduled after the US Federal Reserve cut interest rates last week, kicking off a monetary easing cycle that has given China’s central bank more room to cut rates and boost growth in the face of deflationary pressures.

“We feel the actions we have taken today are a step in the right direction, especially since many of the actions were announced at once, rather than spreading individual actions out more broadly to achieve a more limited impact,” said ING’s Song.

“We still believe there is scope for further easing in the coming months as most global central banks are now on a rate cut path. If we see a significant push from fiscal policy as well, momentum could recover before the fourth quarter,” he said.

Pan took over as governor of the People’s Bank of China in July 2023. During his first press conference as central bank governor in January, Pan said the PBOC would cut the reserve requirement ratio. Policies are rarely announced at such events, and are usually disseminated through online publications and state media.

Then he told reporters in March, on the sidelines of China's annual parliamentary meeting, that there was scope to cut the reserve requirement ratio further, meaning the cut had been widely expected for months.

In contrast to the Fed’s focus on a single key interest rate, the People’s Bank of China uses a range of rates to conduct monetary policy. China’s government system also means that policy is set at a much higher level than that set by financial regulators who spoke on Tuesday. At high-level meetings in July, there were calls for efforts to meet year-round growth targets and boost domestic demand.

China’s economic growth has slowed, driven by a deteriorating property market and falling consumer confidence. Economists have called for more stimulus, especially on the fiscal front.

“We were surprised by the lack of fiscal stimulus even though they seem quite willing to deploy monetary stimulus now,” Edmund Goh, head of China fixed income at Bank of Aberdeen, said in an email Tuesday. “It seems as though the PBOC has a more accurate reading of where the economy stands, but they are unable to convince the central government to run a larger fiscal deficit.”

A Goldman Sachs analysis this month suggested that recent local government bond issuance was aimed at addressing budget deficits rather than supporting additional growth. The property slump has curtailed land sales, previously a major source of revenue for local governments.

The slowdown in property sales has made it difficult for real estate companies to deliver homes on time, Li Yunze, minister of the National Financial Regulatory Administration, said at a press conference on Tuesday.

The department, which expands the scope of 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 to determine which real estate projects should be supported first. Li said more than 5,700 such projects have been approved, with a total funding of 1.43 trillion yuan ($200 billion). This has allowed the completion of more than 4 million homes, he added.

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