China Central Bank Unveils Monetary Easing Package

China’s central bank announced a slew of stimulus measures as the economy struggle to achieve its growth target amid continuing property market downturn, weak domestic activity and rising deflationary pressures.

At a press conference on Tuesday, People’s Bank of China Governor Pan Gongsheng said the bank will reduce the reserve requirement ratio by 50 basis points.

He announced that the rate on seven-day reverse repo will be cut by 20 basis points to 1.50 percent and the rate on one-year medium-term lending facility by 30 basis points.

Pan said the reduction was intended to guide the loan prime rate and deposit rates to move downward and maintain stability in the net interest margin of commercial banks.

The governor said the LPR and deposit rates will be cut by 0.2 to 0.25 percentage points.

The bank also framed measures aims to support property market. The minimum down payment ratio for second homes will be reduced to 15 percent from 25 percent. The bank intends to cut the existing mortgage rates and bring it closer to the new mortgage rates.

He also said the interest rates on existing mortgages will be lowered by 0.5 percentage points.

Further, Pan said the PBoC will establish a swap program for securities, funds and insurance companies to secure liquidity from the central bank through asset collateralization.

They also intend to create a special re-lending facility to assist banks in providing loans to listed companies and major shareholders to buy back shares and increase their holdings.

ING economist Lynn Song said there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory.
“If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter,” said Song.

Economists at Capital Economics said this is a step in the right direction but it will probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support.

“The big picture is that, with households deleveraging and many private firms cautious about borrowing, monetary policy has lost much of its effectiveness in China,” they said.

As such, today’s moves are unlikely to drive a turnaround in credit growth and economic activity, economists concluded.