China's central bank has unveiled a series of groundbreaking steps to invigorate bank lending, signaling a proactive stance in reigniting economic growth. This strategic initiative, disclosed by People's Bank of China Governor Pan Gongsheng during a press conference in Beijing, serves as a precursor to a broader, yet measured, campaign by Chinese authorities aimed at bolstering the economy following a lackluster 2023.
The central piece of this economic puzzle involves a significant cut to banks' reserve requirements, releasing a staggering 1 trillion Chinese yuan (equivalent to $139 billion). This move, set to commence on February 5, is a distinctive departure from expectations, as many economists had anticipated such measures later in the year. Governor Pan's direct announcement underscores the urgency and determination of Chinese authorities to address challenges in both the stock market and the broader economic landscape.
Eswar Prasad, Professor of Trade Policy and Economics at Cornell University and a former head of the International Monetary Fund's China division, acknowledged the significance of the central bank's action. He described it as a positive signal, reflecting the government's commitment to halt the loss in growth momentum and stabilize the turbulent stock market. However, Prasad cautioned that, in isolation, this move might have limited impact amid weakened business and household confidence.
Governor Pan's announcement not only surprised with its timing but also in the manner of delivery. It is uncommon for the central bank governor to directly announce such moves, typically telegraphed by the State Council. This unexpected revelation comes as a response to escalating concerns over the stock market downturn, signaling a desire to mitigate losses while providing a much-needed boost to the broader economy.
This move, the third reserve requirement cut in less than a year, is poised to lower the average reserve requirement across all banks from 7.4% to approximately 7%. The central bank is also set to reduce key rates associated with loans for small businesses and rural enterprises, effective Thursday.
While mainland China's stock markets were closed at the time of the announcement, Hong Kong shares experienced a significant rally in response. The Hang Seng Index, comprising many major Chinese companies, soared by 3.6%, marking its strongest performance in months. On the Chinese mainland, the Shanghai Composite Index closed 1.8% higher.
This positive response follows another encouraging development earlier in the week when the State Council called for additional measures to stabilize the market. The combined effect of these actions led to widespread gains in stock prices, partially recovering from recent declines.
China's economy expanded by 5.2% in 2023, exhibiting a quicker pace than the previous year but still reflecting one of the weakest growth rates in decades, excluding the pandemic years. Challenges emerged as rising interest rates impacted consumer and business spending in the U.S. and Europe, exacerbating a multiyear property downturn. The government's steadfast support, particularly in infrastructure spending and investment in emerging industries, played a crucial role in propping up growth.
Premier Li Qiang, speaking at the World Economic Forum in Davos, Switzerland, emphasized the economy's resilience despite its ups and downs. He highlighted the healthy expansion achieved in 2023 without resorting to massive stimulus, which often brings instability and increased debt. However, experts argue for more robust measures, including increased government spending and decisive actions to address the persistent real estate challenges.
Officials have implemented measures such as loosening home-buying restrictions and making modest cuts to interest rates. Yet, economists express disappointment, calling for more substantial interventions to counter China's rapid economic slowdown effectively. The central bank's approach to maintaining benchmark lending rates and avoiding aggressive rate cuts indicates a measured strategy, particularly in the face of subdued loan demand amidst property market troubles.
Experts predict a continuation of this measured approach to stimulus throughout the year, with fiscal policy taking center stage. The government is expected to finance targeted investments, especially in areas like infrastructure and social housing, aligning with a focus on long-term economic stability.
The immediate concern for officials is the sharp selloff in the stock market, with China's benchmark CSI 300 losing over 40% of its value in the past three years. This trend, coupled with Hong Kong's benchmark index falling 10% since the year's beginning, prompted authorities to take proactive steps to stabilize market sentiment.
Raymond Yeung, Chief Economist for Greater China at ANZ Bank, notes that the authorities are keenly attuned to market sentiment. The unexpected announcement by Governor Pan underscores their commitment to addressing concerns and steering the economy toward stability.
While monetary policy is expected to play a supportive role in ensuring liquidity, economists anticipate a shift toward fiscal policy as the primary driver of economic recovery. Government-backed investments in critical sectors are set to play a pivotal role in propelling growth and mitigating the economic challenges posed by the property market and global uncertainties.
Carlos Casanova, Senior Asia Economist at Union Bancaire Privée, succinctly captures the central bank's role, stating it will be "basically ensuring there's enough liquidity. That's it." This underscores the broader strategy of allowing fiscal policy to lead the way in revitalizing the economy.
As China steers its economic ship through challenging waters, the combination of strategic monetary measures and a forthcoming fiscal thrust sets the stage for a dynamic economic resurgence. The world watches as Chinese authorities deploy a nuanced strategy, balancing the need for growth with concerns over debt, stability, and market dynamics.
