China's PBOC Unveils Major Stimulus Package to Boost Economy and Housing

China's PBOC Unveils Major Stimulus Package to Boost Economy and Housing 

After much speculation across social media, a Chinese zoo recently admitted that their supposed "panda bears" are, in fact, "panda dogs" — regular dogs with painted fur to resemble pandas. This somewhat strange occurrence parallels a more serious admission by the Chinese government: the country's economy is in worse shape than previously expected.

The People's Bank of China (PBOC) has responded by rolling out a series of stimulus measures aimed at boosting the struggling property sector and reviving broader economic activity. Just yesterday, the central bank announced a small but telling cut of 10 basis points to its 14-day repurchase (repo) rate, signaling that further interventions were likely. In line with this expectation, PBOC Governor Pan Gongsheng presented a much larger economic stimulus package today, intended to counter the downturn in the property market, which has been a significant source of financial distress in China.

One of the key measures announced was a reduction in the reserve requirement ratio (RRR) for banks by 0.5 percentage points. Pan suggested that depending on future conditions, the central bank might cut the RRR by an additional 25 to 50 basis points before the end of the year. This reduction is designed to free up liquidity in the banking system, theoretically unlocking around 1 trillion yuan (CNY) in additional capital that could be loaned out into the economy.

However, the impact of this liquidity boost will depend largely on whether there is sufficient demand for loans. In an effort to encourage more borrowing, the PBOC also cut its 7-day reverse repurchase rate from 1.7% to 1.5%, and Pan indicated that a further reduction of the medium-term lending facility rate by 0.3% was likely. Additionally, the loan prime rate (LPR) and deposit rates may see reductions of between 20 and 25 basis points.

What is particularly notable about these moves is that the lower rates will apply not only to new borrowers but also to existing loan holders. Homeowners will have the opportunity to renegotiate their mortgage terms with their current lender, and there is even discussion of allowing people to switch mortgages between banks.

Previously, many of China's easing measures had only benefited new buyers, which led to a wave of early repayments by existing homeowners looking to take advantage of lower interest rates. This trend placed strain on China's banking sector. Although the new refinancing plan could still affect banks' balance sheets and profitability, Pan emphasized that the negative impact should be less severe this time, as financing rates will decrease in tandem with the broader economic adjustments. On average, Pan expects the changes to lower interest rates on existing mortgages by around 0.5%, easing the financial burden on homeowners.

The PBOC estimates that these measures could reduce the mortgage payments for about 150 million people, cutting annual interest payments by an estimated 150 billion yuan. However, it remains unclear whether this refinancing option will be limited to mortgages on first homes, as was the case in a similar policy introduced last year, or whether it will also apply to second-home mortgages. Second-home mortgages, which typically come with significantly higher interest rates, could have a substantial impact on the effectiveness of the policy in reducing early repayments and stabilizing the property market.

In addition to alleviating mortgage burdens, the central bank is also aiming to reinvigorate demand in the property market itself. One of the measures to achieve this is a reduction in the minimum downpayment required for purchasing second homes, which will now be lowered to just 15% of the property's purchase price, down from the previous 25%. The PBOC is also expanding its re-lending program for state-owned enterprises that acquire unsold properties, increasing the liquidity provided from 60% to 100% of the bank loans used for these purchases. This is intended to help clear the overhang of unsold property, a persistent issue in China's real estate sector.

Beyond property, the PBOC's stimulus measures are also aimed at bolstering China's equity markets, which have been under significant pressure. The central bank is setting up a new swap facility that will allow securities firms, funds, and insurance companies to access central bank liquidity for the purpose of purchasing equities. Additionally, the PBOC is considering creating a re-lending facility to provide liquidity for listed companies and major shareholders to buy back shares. These initiatives are designed to restore confidence in China's stock markets, which rose by 4% in response to the announcement.

While these comprehensive measures have been welcomed by traders and have provided a short-term boost to Chinese equity markets, there is still skepticism about whether they will be enough to address the underlying problems facing the Chinese economy. The real estate sector has been in a prolonged slump, with declining home sales, over-leveraged developers, and a general lack of confidence from potential homebuyers. Despite the PBOC's efforts to lower mortgage rates and relax borrowing conditions, there are questions about whether households will be willing to make large purchases like homes, given the broader economic uncertainty and the persistent risk of deflation.

There are also concerns that the measures announced by the PBOC may not go far enough to jump-start the domestic economy and mitigate the deflationary risks that are currently weighing on China's growth prospects. While the lowering of mortgage rates and borrowing restrictions may help to some extent, it may not be sufficient to encourage households to resume buying second homes. To truly restore consumer confidence and revive the real estate sector, broader fiscal measures may be necessary. These could include direct stimulus to consumers or more aggressive government spending on infrastructure and public services.

In contrast to China's bold moves, the Reserve Bank of Australia (RBA) has taken a more cautious approach. The RBA left its cash rate unchanged at 4.35% during its most recent meeting, as widely expected. The central bank's statement following the meeting was little changed from previous months, with officials continuing to emphasize that inflation remains too high, aggregate demand continues to outpace supply, and the labor market is operating beyond its full capacity.

Governor Bullock of the RBA noted that the central bank did not seriously consider raising rates during this meeting, a shift from previous meetings where a rate hike was discussed. This shift in tone suggests that the RBA's hawkish stance may be softening. Recent economic indicators show that while input prices remain elevated, the rate at which output prices are increasing has slowed, implying that the pressure on firms to pass on higher costs to consumers is lessening.

Given these developments, there is growing speculation that the RBA could cut rates sooner than previously expected. While the prevailing view had been that the first rate cut would occur in May, today's meeting may have tilted the balance of risks towards an earlier rate cut.