China’s economic stimulus package is a response to the significant pressures facing the world’s second-largest economy, including deflation, real estate debt, and unemployment. On September 23, the People’s Bank of China (PBOC) announced a series of actions, injecting 234.6 billion yuan (33.29 billion USD) into the banking system through open market operations.
This marks the first time since the 2008 financial crisis that PBOC and the Chinese government have taken such decisive action, aiming for a growth target of 5% in 2024.
What does this stimulus package entail, and how will it assist the Chinese economy? Importantly, will these measures impact global financial markets? Let’s explore this in-depth analysis.
What Does China’s Economic Stimulus Policy Include?
First, we must mention two key entities: the People’s Bank of China (PBOC) and the Chinese government.
The PBOC is the main tool for the Chinese government to implement its monetary policies. The government coordinates with the PBOC through fiscal decisions to achieve economic growth and financial stability.
Understanding the roles of these two entities, let’s review the recent economic stimulus package from China.
Liquidity Injection and Reverse Repo Operations
As mentioned earlier, on September 23, the PBOC provided 234.6 billion yuan to maintain adequate liquidity in the banking system for the final quarter of the year.
The PBOC also executed a 7-day reverse repurchase agreement valued at 160.1 billion yuan (approximately 22.7 billion USD) at an interest rate of 1.7%, along with a similar agreement for 14 days totaling 74.5 billion yuan at 1.85%, down from the previous rate of 1.95%.
To clarify, a reverse repo is a process where the central bank purchases securities from commercial banks through a bidding process with an agreement to sell these securities back in the future.
Interest Rate Cuts and Reserve Requirement Ratio (RRR)
The PBOC has cut the reserve requirement ratio by 50 basis points, allowing banks to lend more capital.
Additionally, the PBOC governor hinted at a potential reduction in benchmark lending rates by 0.2-0.25%.
These measures will enable banks to lend more, providing borrowers (businesses) with access to lower interest rates.
Issuance of Special Government Bonds
China plans to issue special government bonds worth approximately 2 trillion yuan (equivalent to 284.43 billion USD) this year.
The funds from these special bonds will support businesses, create jobs, and revive production amid economic decline.
Reduction in Mortgage Interest Rates
Support measures for the real estate market include reducing the average mortgage interest rate by 0.5 percentage points and lowering the minimum down payment ratio to 15% for all types of homes, among other measures.
While complex, all the policies outlined above are aimed at two main objectives: stimulating economic growth (through lending) and combating deflation (by increasing money supply and reducing production constraints).
So, what are the effects of this economic stimulus package?
Domestic Impacts
China’s economic stimulus policies are expected to boost GDP growth to approximately 5% in 2024. According to Statista, China’s GDP is projected to increase from 17.662 trillion USD in 2023 to 18.532 trillion USD this year.
Inflation is another crucial factor, currently at 0.6%. It has been rising steadily since the deflation period at the end of 2023. However, if the money supply increases without a corresponding increase in production, the prices of goods and services may rise, impacting consumer purchasing power.
Moreover, the struggling real estate market may benefit from these stimulus measures. Initiatives such as reducing mortgage rates and lowering down payments will help stabilize property prices.
However, previous mortgage rate cuts in China mainly benefited new homebuyers, while existing homeowners still faced high rates. As of the end of June this year, outstanding residential mortgages in China stood at 37.79 trillion yuan (approximately 5.3 trillion USD), down 2.1% year-on-year, marking the lowest level in nearly three years.
Not only do these policies affect the domestic economy, but they also have significant implications for global financial markets.
China’s Economic Stimulus and Global Impacts
As a global investor, you may be particularly interested in how these policies impact your portfolio. Let’s delve deeper into this issue.
Effects on Currency Pairs
Overall, the current impact of these stimulus packages on the strength of the CNY is intriguing. Typically, when the money supply increases, the currency tends to weaken. However, in this case, the CNY has performed well.
Specifically, the CNY/USD is trading at 0.1425-0.1426, reaching its highest point in 18 months. Since September 23, this index has increased by about 0.6%. Why is this happening?
It can be said that expectations for China’s economic growth are temporarily overshadowing concerns about excessive money supply. With a stimulated economy driven by low interest rates, market support, and banking policies, many investors are optimistic about the recovery of the world’s second-largest economy.
Additionally, currencies sensitive to China, such as the euro, Australian dollar, and Malaysian ringgit, have surged to three-year highs, particularly against the backdrop of the USD facing pressure from the Fed and a tendency to invest in more cyclical currencies.
The chart below shows the performance of the CNY against the EUR, USD, and AUD.
Trade Impacts and International Relations
The relationship between China and European countries is largely centered around the basic resources sector. According to Reuters, this year, China’s weak economic conditions have caused the STOXX Basic Resources index to underperform all sectors, falling by about -9.83%.
However, right after China announced its strategy, stocks in this sector in Europe performed well. Specifically, the STXE 600 BSRS PR INDEX reached a new peak at 580 after hitting a low in early September. Meanwhile, the overall STOXX 600 index in Europe closed at 528.05 points on September 23, the highest level ever.
What Experts Are Saying
The CEO of Fitch Ratings in China noted that after PBOC announced the interest rate cuts, market sentiment has changed significantly, and confidence in economic growth has improved.
However, he pointed out that monetary easing still requires fiscal measures to effectively expand credit and inject liquidity into the real economy. Experts believe that China’s slowing economy needs more such moves to stimulate growth.
“High leverage has made businesses and households in China reluctant to borrow more, which weakens the effectiveness of the easing monetary policy,” said a Fitch Ratings representative to China Daily.
Key Takeaways from China’s Economic Stimulus Package
We can derive several important insights:
China’s policies differ from others:
- Scale and Nature: China typically implements large stimulus packages focused on infrastructure investment and direct support for manufacturing sectors. In contrast, many developed countries, like the U.S. or EU, tend to adopt flexible fiscal and monetary measures, including interest rate cuts and consumer support.
- Impact: China’s policies mainly aim to maintain economic growth, while other countries may focus on macroeconomic stability and controlling inflation.
- Goals: China tends to aim for rapid short-term recovery, while other countries may consider longer-term structural reforms for sustainability.
- Flexibility: Some countries, like Japan, have adopted ultra-loose monetary policies, while China tends to maintain tighter control over exchange rates and credit.
Impacts of Macroeconomic Policies
First, injecting liquidity into the market does not immediately create excess money supply. On the contrary, investors are increasingly focused on economic growth. When the objective of a policy is positive and investor sentiment is strong, the currency’s performance tends to stabilize.
Second, the USD will still play a role as the world’s reserve currency, making it difficult for the CNY to catch up. Although the Fed has cut rates and announced a monetary easing direction, the outlook for China’s economy still requires more impetus, allowing the USD to outperform. However, it’s essential to continue monitoring, as signs of recession are gradually becoming apparent.
Third, the policies of a major power can have ripple effects on other markets. In this article, we have discussed the Euro area, the manufacturing and materials extraction sectors, currency markets, and indeed the issues related to the balance of trade that we may explore in future articles.
Therefore, investors should cautiously monitor macroeconomic information, as it can directly affect the portfolios they hold. Don’t forget to follow Doo Prime for the most timely information.
Risk Disclosure:
Securities, Futures, CFDs and other financial products involve high risks due to the fluctuation in the value and prices of the underlying financial instruments. Due to the adverse and unpredictable market movements, large losses exceeding your initial investment could incur within a short period of time.
Please make sure you fully understand the risks of trading with the respective financial instrument before engaging in any transactions with us. You should seek independent professional advice if you do not understand the risks explained herein.
Disclaimer:
This information contained in this blog is for general reference only and is not intended as investment advice, a recommendation, an offer, or an invitation to buy or sell any financial instruments. It does not consider any specific recipient’s investment objectives or financial situation. Past performance references are not reliable indicators of future performance. Doo Prime and its affiliates make no representations or warranties about the accuracy or completeness of this information and accept no liability for any losses or damages resulting from its use or from any investments made based on it.
