Beijing partially shuts door to big bang stimulus
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Chan Ka Sing
HONG KONG, Sept 24 (Reuters Breakingviews) -China's central bank has made its move, but will the government follow? That's the big question as the People's Bank of China on Tuesday surprised markets with sweeping rate cuts. It's a sign that Beijing, at least for now, is leaving the economic heavy-lifting to monetary policy rather than fiscal stimulus.
PBOC governor Pan Gongsheng disappointed markets last week by leaving loan prime rates - the benchmark lending rate - unchanged. He caught investors by surprise again just days later with a raft of easing measures, including a 50 basis point cut to the amount of cash that banks must hold as reserves, a move that will release 1 trillion yuan ($140 billion) of cash back into the banking system. Speaking at a press conference with top officials from other financial regulatory agencies, Pan also brought good news to the property market with a 0.5 percentage point reduction on existing mortgage rates.
With hints of more easing to come later this year - a strong message that China's economic planners are finally serious about hitting its annual GDP growth target of "around 5%" - markets rallied promptly. Hong Kong’s benchmark Hang Seng Index .HSI rose as much as 2.5% on the back of the announcements.
Still, without substantial fiscal spending, that may not be enough to stem strong deflationary pressures amid a consumer confidence crisis and a property market crash in the $18 trillion economy. Analysts at Morgan Stanley, for instance, estimate it will take 10 trillion yuan in stimulus funds, with the bulk of that going toward pensions and healthcare, over the next two years to really move the needle; such a move could result in nominal GDP growth topping 5% annually in the coming years.
Beijing, though, is wary of big-bang stimulus. In the wake of the financial crisis in 2009, officials unveiled a 4 trillion yuan package. That helped contribute to all sorts of problems authorities are still trying to address today, including industrial overcapacity and hidden local government debt. It's perhaps not surprising that the central government has repeatedly ruled out another deluge of stimulus.
Instead, the Ministry of Finance will probably continue to roll out piecemeal measures like consumer goods trade-in programs and small-scale infrastructure projects. But with December just a few months away, the window to make an impact is closing fast.
CONTEXT NEWS
The People’s Bank of China on Sept. 24 announced it will cut the bank's reserve requirement ratio, the amount of cash that banks must hold as reserves, by 50 basis points and the seven-day repo rate by 0.2 percentage point to 1.5%. Deposit and other interest rates will fall as well.
Speaking at a press conference with officials from two other financial regulatory agencies, Governor Pan Gongsheng also said interest rates on existing mortgages will be reduced by 0.5 percentage point on average while the minimum down payment ratio for buying a second home will be lowered to 15% from 25%.
Graphic: Investors are betting on Chinese stimulus https://reut.rs/4ek54cI
Editing by Robyn Mak and Ujjaini Dutta
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