What’s happened?
On September 24th a series of policies were announced by China’s three top financial officials at a press conference to backstop the stalling economy. These notably included a 20-basis-point cut to the seven-day reverse repo rate (RRR; the policy interest rate); a 50-basis-point cut to the reserve requirement ratio (RRR); a rate cut on existing mortgages; capital replenishment of large state-owned banks; and other measures to support the housing and the stock markets.
Why does it matter?
The rare, simultaneous rollout of so many measures highlights the urgency for policymakers to prop up the economy. We believe that real GDP growth this year will miss the government’s annual target, and may even undershoot our own conservative growth forecast of 4.7%. The cuts to the policy interest rate and the RRR in particular will be enforced in the coming days, earlier than we previously expected, in October. The magnitude of monetary easing also exceeds our expectations: the policy rate cut is more aggressive than our assumption of 10 basis points, and Pan Gongsheng, the central-bank governor, mentioned the possibility of a further RRR cut by end-2024, a move that previously had been outside our forecast. Although these measures will not fundamentally reverse the low appetite for credit in the economy, they will at least bolster lending in support of public investments. The actions demonstrate that the government is willing to take proactive measures to support growth, rather than tightening for the sake of defusing systemic risk.
The outlook for the property sector nonetheless remains dim. Given that the borrowing costs for new mortgages have already been lowered, the announced adjustment to rates on existing mortgages, averaging 50 basis points, has no direct effect on the housing market other than moderately reducing household financial burdens. The measure is equivalent to an Rmb150bn (US$21.3bn) cash handout to mortgage borrowers via reduced interest payments. However, based on data from official household income and spending surveys, we estimate that only about Rmb91bn (or 0.07% of nominal GDP) will translate into consumption. Other moves, including lowering the minimum down payment ratio for purchasing pre-owned homes and ramping up central bank support to affordable housing at local levels, are largely extensions or upgrades to existing measures that have failed to stabilise the markets. Although lowering the down payment ratio contributed to a property market boom in 2015, the same moves adopted in May 2024 were no longer effective, when supply outstripped demand by far.
Although markets will welcome the monetary and financial policy “bazooka”, their effectiveness will be limited by the pervasive lack of confidence and sustained risk aversion. Against that backdrop, stabilising China’s growth ultimately requires extra public spending. However, in the light of a consistent shortfall in fiscal revenue—the aggregate revenue, which consists of the general government revenue and the government fund revenue, dropped by 6% year on year in January-August—a spending increase will have to come from other sources. Should economic activity indicators continue to fall, an interim fiscal expansion through a budget revision and the deployment of policy bank credit could be possible policy options. We currently assign a 30% probability to that scenario, understanding that the authorities have not considered that option seriously.
What next?
The policies will not alter our growth forecast, but will dispel some of the downside risks attached to it. The government will decide whether to proceed with future interim fiscal expansion plans in October; if a fiscal package amounting to hundreds of billions of renminbi is passed, and spent in large part within this year, it could create upside risks to our growth forecasts for 2024 (4.7%) and 2025 (4.4%).