China has cut rates, now it needs a fiscal policy package: former central bank adviser
Outspoken economist Yu Yongding calls for more infrastructure investment ‘or we won’t meet this year’s 5 per cent growth target’
The stimulus package has received “positive feedback”, but to enhance its effectiveness, greater fiscal policies are necessary, Yu told the Tsinghua PBCSF Chief Economists Forum.
With only three months left of the year, achieving the government’s 5 per cent growth target for 2024 would be challenging, said Yu, who now serves as academic adviser for the Beijing-backed think tank China Finance 40 Forum.
Economists at the Beijing forum largely agreed on the serious challenges ahead and the need for more expansionary fiscal and monetary policies.
While advocating for greater fiscal expansion, Yu noted that China should start with increasing infrastructure investment, “or we won’t meet this year’s 5 per cent growth target”.
On whether economic revival should rely on stimulating consumption or investing in infrastructure, he argued that consumption would not be enough to prop up growth, pointing to weak consumer confidence amid declining income growth and falling asset values.
Raising infrastructure investment would work more directly and bring results faster, he asserted, but cited one major issue.
“China has significant infrastructure gaps and many projects to undertake. [But] we are facing a funding shortfall.”
Yu said there was still substantial room for expansion in China’s fiscal policy despite worries about government leverage.
The authorities needed to re-evaluate some fiscal policies as they were pro-cyclical rather than countercyclical, he said, citing some local governments’ bans on new investment unless previous debts are cleared.
According to Yu, China’s priorities for the rest of the year should be looking at infrastructure projects and releasing a comprehensive policy package, including fiscal and monetary stimulus.
“Even if it’s too late to implement now, it’s crucial to signal such intentions to boost market confidence,” he said.
“And even if this year’s growth rate falls below 5 per cent, the outlook for next year will be better.”
Lu Ting, chief China economist at investment bank Nomura, also emphasised the importance of infrastructure building for short-term results, especially cross-regional key projects that had been fully assessed and launched in places where the population was still flowing in.
“We should find ways to spend money in the short term without causing serious problems in the medium to long term,” Lu told the same forum.
A slew of investment banks have lowered their forecasts for China’s full-year growth rate after worse-than-expected figures in recent months.
Earlier this month, Goldman Sachs and Citigroup lowered their full-year projections to 4.7 per cent, from previous forecasts of 4.9 per cent and 4.8 per cent, respectively.
Explainer | 7 takeaways from China’s most significant stimulus package since the pandemic
High-ranking Chinese officials, led by People’s Bank of China governor Pan Gongsheng, unveil a slew of policies to boost world’s second-largest economy
People’s Bank of China governor Pan Gongsheng, minister of the National Administration of Financial Regulation Li Yunze and China Securities Regulatory Commission chairman Wu Qing held a joint press conference in Beijing on Tuesday.
Specifically, analysts hailed the measures announced by the PBOC as the “most significant stimulus package since the early days of the pandemic”, but said greater fiscal support would still be needed to drive a turnaround in growth, with the world’s second-largest economy struggling to show an obvious rebound.
1. Short-term policy rate cut the ‘most important move’
The move to lower the benchmark seven-day reverse repo rate – regarded as the most important benchmark rate following a change to the PBOC’s policy – from 1.7 per cent to 1.5 per cent, was hailed by Lynn Song, chief economist for Greater China at ING, as the “most important move”.
“Given previous patterns, markets had been leaning toward expecting multiple 10-basis-point rate cuts, so a 20-basis-point cut represents a slightly stronger than expected move,” he said.
“However, the net impact will depend on whether we see further cuts ahead, or whether the PBOC falls into a wait-and-see mindset after today’s policy package.”
The seven-day reverse repo is a type of short-term loan that the central bank uses to increase liquidity and influence other rates in the banking system.
Pan said the cut could effectively lower the one-year medium-term lending facility by 0.3 of a percentage point, and the loan prime rate by between 0.2 and 0.25 of a percentage point.
And in line with the measures unveiled a day earlier, China’s central bank on Wednesday cut the rate on 300 billion yuan (US$42.6 billion) worth of one-year medium-term lending facility loans to some financial institutions from 2.3 per cent to 2 per cent.
2. Mortgage rate cut ‘unlikely’ to lift consumption
Existing mortgage rates would also be reduced by around half a percentage point on average, according to Pan.
Betty Wang, lead economist at Oxford Economics, said the move would narrow the interest-rate gap between new and existing mortgages, which has been a key motivation for homebuyers to repay home loans in advance over the past couple of years.
“The announced cuts to existing mortgage rates are smaller than what had previously been reported. And although the PBOC says the cuts will lower interest payments for homeowners by 150 billion yuan, the net transfer to households will be offset by the planned reduction in deposit rates. As such, it is unlikely to provide much support to consumption,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
Song at ING said the cut “could offer some support for consumption in the coming month”, but that given the current propensity to save, the “effect certainly will not come through on a 1:1 basis”.
3. ‘Well-signalled’ RRR cut to ease pressure on banks
With the “most significant measures” announced by the PBOC, according to Evans-Pritchard, the central bank also announced a cut of half a percentage point to the RRR – the amount of cash that commercial banks must hold as reserves.
“The RRR cut will help reduce pressure on bank profitability by reducing the share of their assets that are locked up at the PBOC earning a low rate of return,” Evans-Pritchard said.
“But it won’t directly translate to stronger lending, especially since the move to a narrower rate corridor means the liquidity injected by the RRR cut will be quickly mopped up by the PBOC’s repo operations.”
This move, in our view, is mostly to help buoy sentiment
Pan said that, with the RRR for the banking sector around 6.6 per cent, the PBOC still had more room to cut compared with the international level, and that the central bank may lower the rate by a quarter or half a percentage point by the end of the year.
The “well-signalled move” would bring the RRR for major banks from 10 per cent to 9.5 per cent, according to Song at ING.
“This move, in our view, is mostly to help buoy sentiment, as the current issue is not banks lacking the funds to lend, but rather a lack of high-quality borrowing demand amid downbeat sentiment,” he said.
The cut to the RRR is expected to provide liquidity of about 1 trillion yuan (US$141 billion) into the market, according to Pan.
4. Down payment ratio change downplayed
Pan also said the down payment ratio on second-home purchases would be reduced from 25 per cent to 15 per cent following a similar move for first-home purchases in May.
But Song said that, due to the downbeat sentiment, the move is expected to have a limited impact, as households are unlikely to be swayed by the prospect of taking on a larger mortgage to acquire a second property when the overall price momentum is still trending downward.
5. Relending programme could ease banks’ reticence
It will be worth closely monitoring how housing inventories develop in the coming months
The loan, of which 60 per cent was funded by the central bank, would see the ratio lifted to 100 per cent.
“This is a move that should ease the reticence of some banks to provide property-related loans and should help to accelerate property acquisition,” added Song at ING.
“It will be worth closely monitoring how housing inventories develop in the coming months, and how proactive state-owned enterprises are in this process.”
6. 500-billion-yuan structural monetary policy facility established
As for the capital market, a structural monetary policy facility of 500 billion yuan (US$70.9 billion) would be established to allow security houses, fund-management firms and insurance companies to tap liquidity when purchasing stocks via a swap line of pledging their assets for high-quality assets.
7. 300-billion-yuan relending facility established
A relending facility of 300 billion yuan, with an interest rate of 1.75 per cent, would be established to guide banks to support listed companies’ stock buy-backs and purchases.
