San Francisco Frontiers - China unveils fresh stimulus to boost ailing economy

The world's second-largest economy has yet to achieve a highly anticipated post-pandemic recovery and its leadership has set a goal of five percent growth in 2024 -- an objective analysts say is optimistic given the headwinds it is facing.

On Tuesday, central bank chief Pan Gongsheng told a news conference in Beijing that it would cut a slew of rates in a bid to boost growth.

China will "reduce the reserve requirement ratio (RRR) and the policy interest rate, and drive the market benchmark interest rate downward", he said.

"The reserve requirement ratio will be cut by 0.5 percentage points in the near future."

The move will inject around a trillion yuan ($141.7 billion) in "long-term liquidity" into the financial market, he said, adding that Beijing would "lower the interest rates of existing mortgage loans and unify the down payment ratios for mortgage loans".

It will also "guide commercial banks to lower the interest rates of existing mortgage loans to the vicinity of the interest rates of newly issued loans".

Pan said the decision would "benefit 50 million households and 150 million people, reducing the average annual household interest bill by about 150 billion yuan."

"So it helps to promote the expansion of consumption and investment," he said.

- 'Bolder than expected' -

Shares in Hong Kong and Shanghai rallied Tuesday after China unveiled the measures.

One analyst told Bloomberg the moves were "bolder than expected, with both rate cuts and RRR cuts (announced) at the same time".

"We see room for bolder easing ahead in the coming quarters," Becky Liu, head of China macro strategy at Standard Chartered Bank, said.

Property and construction have long accounted for more than a quarter of China's gross domestic product, but the sector has been under unprecedented strain since 2020, when authorities tightened developers' access to credit in a bid to reduce mounting debt.

Since then, major companies including China Evergrande and Country Garden have teetered, while falling prices have dissuaded consumers from investing in property.

Beijing has unveiled a number of measures aimed at boosting the ailing sector, including cutting the minimum down payment rate for first-time homebuyers and suggesting the government could buy up commercial real estate.

But those measures failed to boost confidence and housing prices have continued to slide.

Adding further strain, local authorities in China face a ballooning debt burden of $5.6 trillion, according to the central government, raising worries about wider economic stability.

Speaking alongside the central bank chief Tuesday, Director of the National Administration of Financial Regulation Li Yunze said Beijing will "actively cooperate in resolving real estate and local government debt risks".

"China's financial industry, especially large financial institutions, is operating stably and risks are controllable," he insisted.

"We will firmly maintain the bottom line of preventing systemic financial risks," he added.

D.Parker--SFF