The Strategist

China’s central bank announces a combination of policy easing measures in support of the real economy

On September 24, People's Bank of China (PBOC) Governor Pan Gongsheng announced an extensive monetary easing package, including rate cuts, RRR reductions, and mortgage policy relaxations, surpassing market expectations. Immediate market reactions saw a surge in stock markets, bond rallies, and a weaker yuan, reflecting investor optimism.

Date
Author
Alessandro Fezzi, LGT Research Content & Publications
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10 minutes

Strategist China
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PBOC Governor Pan Gongsheng announced a significant and comprehensive monetary easing package that has surpassed market expectations. This package includes a series of rate cuts, a reduction in the reserve requirement ratio (RRR), mortgage policy relaxations, and new instruments to support the stock market. The measures are aimed at boosting liquidity, supporting the housing market, and stabilising the financial system, marking it the most significant easing efforts since 2015.

Lower interest rates and reserve requirement ratio for banks 

The PBOC has lowered the interest rates across several key benchmarks. The seven-day reverse repo rate was cut by 20 basis points (bps) to 1.5%, the one-year Medium-term Lending Facility (MLF) rate by 30bps, and the Loan Prime Rate (LPR) and deposit rates by 20-25bps. These simultaneous but asymmetric cuts are designed to maintain a stable net interest margin (NIM) for banks, ensuring they can continue to provide credit support to the economy without significantly reducing their profitability.

In addition to rate cuts, the PBOC has lowered the RRR by 50bps, injecting approximately 1 trillion yuan of liquidity into the banking system. Markets expect that this move, which reduces the weighted RRR for Chinese banks from 7% to 6.6%, is followed by another 25-50bps cut before the end of the year, depending on macroeconomic developments. The RRR cuts are intended to stabilise liquidity and reduce banks' liability costs, enabling them to offer more affordable loans to businesses and consumers.

Lower downpayment requirement and interest rates for mortgages

The package also includes significant changes to mortgage policies. The minimum downpayment requirement for second home mortgages has been unified with that for first homes, lowering it to 15%. Additionally, the interest rates on existing mortgages will be reduced by 50bps through mortgage refinancing, potentially saving borrowers around 150 billion yuan in interest payments. The PBOC has also enhanced its re-lending facility to support the purchase of housing inventory, increasing the share of re-lending funds in such operations from 60% to 100%.

Refinancing facility for share buybacks and shareholdings to stabilise stock market

To support the stock market, the PBOC has introduced a special refinancing facility for share buybacks and shareholdings, guiding banks to provide loans to listed companies and shareholders for these purposes. These measures are aimed at stabilising the stock market and encouraging investment, which is crucial for overall economic confidence.

Immediate market response 

While China stock markets rose more than 4%, bonds rallied with yields hitting record lows and China’s onshore yuan weakened to 7.06 against the US dollar.

Conclusion

In our view, the central bank's announcements represent a meaningful effort to address current economic challenges, and the measures signal that policy makers are under pressure to act. While the impact on the housing market and consumption may be limited due to underlying structural issues that are weighing on private demand and corporate investment activity, the measures are expected to provide substantial support to the financial system and help mitigate downside risks to economic growth in the near term. 

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