China Issues Largest Stimulus Package Since the Pandemic

The central bank announced interest rate cuts, larger funding, and property market support.

The measures are greater than analysts’ expectations and are aimed at fixing the deflationary pressures and low growth. However, some analysts warned that more fiscal stimulus would be needed also.

The funding will come from a reduction in the reserve requirement ratios (RRR) by 50 basis points, the amount of cash banks must hold as reserves. The cut in RRR will free around $142 billion for new loans.

The central bank also stated that they may cut the RRR a further 25 to 50 basis points, depending on the market liquidity, later on in the year. The PBoC will also cut interest rates and the 7-day reverse repo rate, which is used to give the market short-term liquidity.

The cut in the reverse repo rate will allow banks to finance themselves at 1.5% instead of 1.7%. To prop up the property market, the central bank will slash average existing mortgage rates by 50 basis points, and reduce the downpayment requirement to 15% of the price for all homes.

The PBoC will also fund a swap program of 500 billion yuan, allowing insurers, brokers, and funds access to cheap cash to buy stocks. The central bank will also provide 300 billion yuan in loans to banks to help fund buy-backs and other share purchases.

Stock Markets to Get Boost

Shares that are exposed to China can expect to benefit the expansive policies. China is the second largest trading partner of Germany and Japan. Worthy of mention, China was overtaken by the USA in Q1 2024 as Germany’s largest trading partner.

The DAX is down 0.48% and the NIKKEI225 is up 0.25% on the day. More specifically, certain sectors are likely to outperform the broader market. Luxury goods and miners have already seen a rally after the news in the European session.

The mining sector is expected to benefit from an improvement in the Chinese real estate market. While luxury goods makers are expected to get a rise in sales from their clients in China who have a high demand for European brand names.

The European miner’s index (SXPP) rose 4.6%, while the Australian mining stocks were up 2.8%, their first daily rise in 12 months. The benchmark for European luxury stocks (STXLUP) jumped 3% today. If the index maintains the rally, it would be the biggest one-day rally this year.