China's central bank goes big with monetary easing
Add Axios as your preferred source to
see more of our stories on Google.
People's Bank of China governor Pan Gongsheng (left) announces new policy measures alongside top financial regulators. Photo: Adek BerryAFP via Getty Images
The People's Bank of China unleashed a fusillade of measures aimed at arresting the nation's economic malaise Tuesday morning.
Why it matters: The world's second-largest economy faces a popping property bubble, inadequate consumer demand and the risk of spiraling deflation. The new actions show the government's resolve to get growth back on track — but also the limits of the policy tools it is willing to use to achieve that goal.
Driving the news: The PBOC, in a surprise move, cut both its target policy interest rate and the required reserve ratio for banks, which is intended to fuel more lending.
- It also lowered down payment requirements on mortgages and announced new funds to support the stock market.
- In a rare news conference alongside top financial regulators, PBOC governor Pan Gongsheng said that the moves "will help support the real economy, incentivize spending and investment and also provide a stable footing for the exchange rate."
State of play: The moves, which constitute the central bank's most aggressive concerted monetary easing since 2015, fueled a rally in markets, with the Shanghai-Shenzhen CSI 300 index up 4.3% on Tuesday.
- Interest rates on Chinese bonds continued a long downward march, with 10-year government securities falling below 2% for the first time on record.
Yes, but: The central problem for the Chinese economy is one of deep imbalance, a combination of overinvestment in real estate and heavy industry with underconsumption by Chinese consumers. The PBOC actions don't do much to fix that.
- Indeed, with much of the new initiative focused on stimulating the property sector, it may actually slow the process of finding a bottom for Chinese real estate.
- It has echoes of how the Federal Reserve's monetary stimulus to address a popping U.S. housing bubble in 2007 and 2008 was inadequate for the task of preventing broader economic distress.
- "Monetary easing is helpful, but it has its limits," wrote JPMorgan economists Haibin Zhu, Grace Ng and Tingting Ge in a note Tuesday morning, adding that "fiscal policy can play a bigger role in the current economic situation."
Zoom out: The Fed's decision to cut interest rates by an aggressive half percentage point last week may have paved the way for the aggressive move because it lowered the PBOC's risk of triggering downward pressure on its currency.
- It's an example of how, given the dollar's central role in global trade and financial markets, the Fed's moves have outsized ripple effects worldwide.
