Beijing unleashes stimulus package to kick-start spending

China’s central bank has unleashed its most substantial stimulus package since the pandemic after growing discontent over a stagnating economy finally prompted action from policymakers in Beijing.
In an unexpected move on Tuesday, China’s central bank cut a key interest rate by 20 basis points and reduced its bank reserve ratio by half a percentage point to help stimulate lending to the private sector. Economists said that the easing would inject a trillion yuan (£106 billion) into the world’s second largest economy.
Beijing’s authorities acted after recent data showed the economy was falling short of the government’s target of 5 per cent growth for this year. The yuan, China’s currency, initially fell on the rate cut but then rose to a 16-month high of 7.03 against the dollar. The stimulus measures also helped to drive up global stock prices and lifted currencies exposed to China’s fortunes, such as the euro.
The monetary easing is intended to definitively lift confidence and encourage Chinese households to increase their spending to support domestically generated growth. The rate cut will inject extra liquidity into an industrial sector that is already suffering from over-capacity, and the central bank hinted that more easing could be on the cards.
Pan Gongsheng, head of the central bank, also took steps to help home-buyers and mortgage-holders, with many in negative equity after a collapse in the property market. At a news conference in Beijing, Pan said that he was ordering banks to cut their mortgage rates by an average half a percentage point, benefiting 150 million people.
He also announced that the higher deposit rate of 25 per cent required for second home-owners would be abolished, equalising it across the board at 15 per cent.
The Chinese economy expanded by 5.2 per cent last year, far lower than the average of 10 per cent recorded in the 40 years after the economy opened up to the world under premier Deng Xiaoping in 1979.
Since the pandemic the Communist Party has imposed a 5 per cent growth target. This figure was felt to be too optimistic for this year, particularly if Xi Jinping, the current premier, enacts long-promised structural reforms to rebalance the economy between investment and consumption.
Xi has also been accused by international economists of prioritising security over long-term growth by reining in China’s new generation of tech billionaires and overseeing raids of western companies who are accused of crossing the often unclear “red lines” on doing business in the country.
The spectacular downfall of a number of giant property firms, led by Evergrande and Country Garden, has created wastelands of unsold and unfinished apartment complexes, further adding to consumers’ concerns. It also has put pressure on local governments who were dependent on land leases to pay debts built up over years with the construction of motorways, high-speed railways and subsidised industrial parks.
The central bank governor said that further monetary easing was possible, including more cuts to the reserve ratio. Analysts warned that without direct fiscal stimulus to match, the bank’s actions might not be enough to restore confidence.
“China is plagued by a shortfall in domestic demand, rooted in the deep structural adjustment in the property sector downturn, as well as dull private sector sentiment,” Duncan Wrigley, of Pantheon Macroeconomics, said. “Today’s raft of monetary policy support juiced up financial market sentiment and should provide a short-term boost to growth, especially if accompanied by determined fiscal policy efforts, but it isn’t a magic pill.”
The package was a “step in the right direction” according to Julian Evans-Pritchard, head of China economics at Capital Economics, but “still falls short of what’s needed”.
Xi has said that the Communist Party will not resort to lifting consumer spending through measures such as stimulus cheques to households, rejecting the kinds of policies taken by the US government during the pandemic. Xi has said China will not emulate the profligacy of western economies and instead boost prosperity through manufacturing and export growth.
London’s miners were among the FTSE’s biggest beneficiaries of China’s announcement as the measures boosted demand for commodities (Tom Saunders writes).
The plans, which included support for China’s property sector, prompted the prices of base metal to rise across the board. China is the biggest consumer of metals, and its economic downturn has put pressure on the smelting and mining industries.
Three-month copper prices on the London Metal Exchange were up 1.9 per cent to $9,733 a metric ton after reaching $9,770, the highest price since July 16, earlier in the session. Zinc touched its strongest price since July 11 before settling at $2,978 a metric ton, up 3.2 per cent.
Antofagasta, the Chilean copper miner, rose by 115p, or 6.3 per cent, to close at £19.40 and Anglo American, which also mines a significant amount of copper, was 141p, or 6.6 per cent, higher at £22.63½. Rio Tinto jumped by 219½p, or 4.5 per cent, to £50.49 and the commodities giant Glencore rose by 15p, or 3.9 per cent, to 399¾p.