China’s central bank has announced a surprise cut to the amount of cash that banks must hold in reserve, hoping to boost the lending available to households and businesses as policymakers try to steer the economy through a fragile recovery.
Pan Gongsheng, the governor of the People’s Bank of China (PBOC), said on Wednesday that the reserve requirement ratio would be cut by 0.5% from 5 February, the deepest cut to the rate since December 2021. The move will allow about 1tn yuan (£110.8bn) to be released in the form of new loans.
Economists had been expecting a rate cut later in the year. But the surprise decision came as the Chinese authorities have tried to put a floor underneath tumbling stock markets, which have set China’s economy off to a shaky start in 2024. After Pan’s announcement, the Hang Seng index closed on Wednesday up by 3.6%, its strongest performance in months.
The authorities are reportedly considering a more full-throttled stimulus package, which could be announced this week, and which would be worth about 2tn yuan.
But the government’s public statements suggest that Beijing may continue its relatively cautious approach, rather than injecting the massive stimulus that economists say is necessary to reboot the economy. The PBOC said on Wednesday that the reserve rate cut was part of its strategy of implementing “prudent monetary policies”. China’s premier, Li Qiang, said last week that China did “not seek short-term growth”. When the central bank last made a similarly deep cut, in 2021, about 80% of the unleashed funds were needed to repay loans to the central bank, rather than being doled out to households.
“It does put a floor under Chinese growth, and certainly allows some form of stability,” Samy Chaar, the chief economist at the wealth management firm Lombard Odier, told Reuters. But, Chaar added, “We’re still very, far from any kind of decisive policy intervention to really change the economic direction of the country.”
Household wealth and consumer demand in China are largely underpinned by the property sector, which accounts for between a quarter and a third of GDP. The sector has struggled to recover from the Covid-19 pandemic and a regulatory whirlwind unleashed in 2020 that crippled many major property developers, such as Evergrande and Country Garden. Hundreds of developments were abandoned, leaving homebuyers without apartments that they had poured their savings into.
That has torpedoed confidence in the economy to a degree that is proving difficult to undo, despite recent measures aimed at supporting the property sector. This month the housing ministry and the financial regulator announced plans for a new mechanism that would speed up loan approvals for property developers.
But demand for new homes remains low. The value of new home sales among the 100 biggest real estate companies dropped by 16.5% in 2023, with a 34.6% year-on-year drop in December.
China’s leaders are expected to set a GDP growth target of 5% at this year’s National People’s Congress, the parliamentary meeting that takes place every March. The economy expanded by 5.2% in 2023, according to official statistics, although some economists believe the true rate of growth was lower.
