China ramps up stimulus to prop struggling economy, announces more interest rate cuts

China’s central bank on Friday lowered interest rates and injected liquidity into the banking system as Beijing assembled a last-ditch stimulus assault to pull economic growth back towards this year’s roughly 5 per cent target.

More fiscal measures are expected to be announced before China’s week-long holidays starting on Oct. 1, after a meeting of the Communist Party’s top leaders showed an increased sense of urgency about mounting economic headwinds.

On the heels of the Politburo huddle, China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of fresh fiscal stimulus, two sources with knowledge of the matter have told Reuters.

Capital Economics chief Asia Economist Mark Williams estimates the package “would lift annual output by 0.4% relative to what it would otherwise have been”.

“It’s late in the year, but a new package of this size that was implemented soon should be enough to deliver growth in line with the ‘around 5 per cent’ target,” he said.

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Chinese stocks are on track for the best week since 2008 on stimulus expectations.

The world’s second-largest economy faces strong deflationary pressures due to a sharp property market downturn and frail consumer confidence, which have exposed its over-reliance on exports in an increasingly tense global trade environment.

A wide range of economic data in recent months has missed forecasts, raising concerns among economists that the growth target was at risk and that a longer-term structural slowdown could be in play.

On Friday, data showed industrial profits swinging back to a sharp contraction in August.

“We believe the persistent growth weakness has hit policymakers’ pain threshold,” Goldman Sachs analysts said in a note.

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As flagged on Tuesday by Governor Pan Gongsheng, the People’s Bank of China on Friday trimmed the amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), by 50 basis points, the second such reduction this year.

The move is expected to release 1 trillion yuan ($142.5 billion) in liquidity into the banking system and was accompanied by a cut in the benchmark interest rate on seven-day reverse repurchase agreements by 20 bps to 1.50 per cent.

The cuts take effect on Friday and Pan, in rare forward-looking remarks, left the door open to another RRR reduction later this year.

Fiscal oomph

Given weak credit demand from households and businesses, investors are more focused on the fiscal measures that are widely expected to be announced in coming days.

Reuters reported on Thursday that 1 trillion yuan due to be raised via special bonds will be used to increase subsidies for a consumer goods replacement programme and for the upgrade of large-scale business equipment.

They will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child.

China aims to raise another 1 trillion yuan via a separate special sovereign debt issuance to help local governments tackle their debt problems.

Bloomberg News reported on Thursday that China is also considering the injection up to 1 trillion yuan of capital into its biggest state banks.

Most of China’s fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13 trillion in debt.

The looming fiscal measures would mark a slight shift towards stimulating consumption, a direction Beijing has said for more than a decade that it wants to take but has made little progress on.

China’s household spending is less than 40 per cent of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above but has been fuelling much more debt than growth.

The politburo also pledged to stabilise the troubled real estate market, saying the government should expand a white list of housing projects that can receive further financing and revitalise idle land.

The September meeting is not usually a forum for discussing the economy, which suggests growing anxiety among officials.

“The ‘shock and awe’ strategy could be meant to jumpstart the markets and boost confidence,” Nomura analysts said in a note.

“But eventually it is still necessary for Beijing to introduce well thought policies to address many of the deep-rooted problems, particularly regarding how to stabilize the property sector.”