China's central bank unveils support measures amid economic downturn

In response to a worsening economic downturn, China's central bank has announced a series of support measures aimed at revitalizing the economy. These initiatives focus on enhancing liquidity, promoting growth, and stabilizing financial markets. The central bank's actions reflect its commitment to addressing the challenges faced by the economy and fostering a more resilient financial environment to help navigate through these difficult times.

‍BEIJING — The People's Bank of China (PBOC) will reduce the reserve requirement ratio (RRR) by 50 basis points, according to Governor Pan Gongsheng at a press conference on Tuesday. While he did not specify the exact timing of this policy easing, he indicated it would occur in the near future. Depending on economic conditions, additional cuts of 0.25 to 0.5 basis points may occur by year-end, he noted.

Additionally, Pan announced a 0.2 percentage point reduction in the 7-day repo rate. Following his initial remarks, China’s 10-year government bond yield fell to a record low of 2%. Pan later suggested that a cut of 0.2 to 0.25% in the loan prime rate (LPR) is feasible, though he did not clarify if this refers to the one-year or five-year rate. Last Friday, the PBOC opted to maintain its main benchmark lending rates.

He stated that official announcements regarding policy changes would be available on the central bank's website, although he did not indicate when this would occur. This high-level press conference was convened after the U.S. Federal Reserve's recent interest rate cut, which provided the PBOC with more flexibility to lower rates and stimulate growth amidst deflationary pressures.

Pan, who took office as PBOC governor in July 2023, had previously mentioned plans to cut the RRR during his first press conference in January. Such policy statements are uncommon in press conferences and are usually released through official channels. In March, during the annual parliamentary meeting, he highlighted the possibility of further RRR reductions, which are widely anticipated in the coming months.

Unlike the Fed, which primarily focuses on a main interest rate, the PBOC employs a range of rates to manage its monetary policy. Following the Fed's rate cut, the PBOC decided to keep the loan prime rate unchanged, impacting corporate and household loans, including mortgages.

China’s governance structure means that policy decisions are made at a higher level than that of the financial regulators who spoke on Tuesday. Meetings held in July emphasized the need to meet full-year growth targets and boost domestic demand.

While the PBOC maintained the loan prime rate following the Fed's decision, it has acted to lower short-term rates that affect money supply. On Monday, the PBOC reduced the 14-day reverse repo rate by 10 basis points to 1.85%, but did not lower the 7-day reverse repo rate, which was cut to 1.7% in July. Pan expressed a desire for the 7-day rate to serve as the main policy rate.

China's economic growth has been hampered by a downturn in the real estate sector and low consumer confidence. Economists are advocating for increased stimulus measures, particularly in fiscal policy.

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Source: CNBC‍