Can China's Stimulus Blitz Fix Its Flagging Economy?

10/7/2024 1:13:59 AM

(MENAFN- Asia Times) Pan Gongsheng, the governor of China's central bank, announced a raft of measures on September 24 aimed at boosting the country's flagging economy. The move, which came a week before the 75th anniversary of communist party rule, was made in response to concerns that China could miss its own 5% annual growth target.

The stimulus package included a 0.5 percentage point cut in the amount of cash reserves that commercial banks are required to have as deposits with the central bank. This should free up approximately 1 trillion yuan for new lending. Pan said that the ratio could be cut by another 0.25 to 0.5 percentage points later in 2024.

The central bank has also made a 0.2 percentage point cut in the rate at which it lends money to commercial banks. Pan signaled that this could be followed by a 20–25 basis point cut in the rate that is charged to borrowers with the best credit rating.

In an attempt to stem the downward spiral that in August saw house prices fall by their fastest rate in nine years, the central bank has reduced the deposit requirement for people looking to buy a second home from 25% to 15%, too.

Credit expansion, at least in the short term, should have a positive effect on financial markets and the price of commodities as investors expect a boost in demand for goods and services. And, following the slew of new measures, this is exactly what we have seen.

China's main stock index surged by more than 4% within hours of the central bank's announcement, enjoying its best single-day rally in 16 years. And this was followed by a more than 1% increase in the benchmark price of oil. Sentiment has remained positive since then, with Chinese shares rising by approximately 20% over the five days following the announcement.

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