More than expected, but still not enough
China’s central bank (PBoC) has rolled out the most sweeping slate of measures to date to revive the economy.
The details: On Tuesday, PBoC Governor Pan Gongsheng announced the central bank is cutting the interest rate on seven-day reverse repos – it’s key policy rate – by 20 bps to 1.5%.
Additionally, the PBoC will cut banks’ reserve requirement ratio (RRR) by 0.5 ppts, though officials didn’t say when the cut will take effect.
- The RRR cut will unleash about RMB 1 trillion of liquidity into the banking system.
Pan also took the unusual step of giving forward guidance, saying the RRR may be cut a further 0.25-0.5 ppts this year.
The PBoC will also provide financial support for the stock market.
- It is creating a relending facility so that listed companies and their major shareholders can borrow cheaply to fund share buybacks.
- It will also create a swap facility to provide insurers, securities brokerages, and fund management companies with liquidity – in return for pledged assets – so that they can increase stock purchases.
Get smart: For most of this year, Beijing has focused on improving corporate governance among listed companies, in hopes that the improvements would result in higher share prices. They haven’t.
- Officials are now resorting to their old ways of trying to directly pump up prices.
Get smarter: For its part, the monetary loosening is highly welcome.
- The RRR cuts create space for the government to ramp up bond issuance, and the rate cut reduces bank funding costs.
Our take: That said, while these measures are helpful, they still aren’t enough to supercharge the economy.
- That would require an aggressive fiscal expansion directly from the central authorities.