China Cuts Interest Rates to Revive Slowing Economy and Struggling Property Market

China, the world’s second-largest economy, has just rolled out its boldest economic intervention since the pandemic, aiming to kickstart growth and prevent a looming crisis in its property sector. The People’s Bank of China (PBOC), under Governor Pan Gongsheng, has taken dramatic steps, reducing interest rates, cutting mortgage payments, and loosening restrictions on stock market investments. But will these measures be enough to reverse the economic slowdown?

Graham Watson's insight:

This is a relatively unusual move by the Chinese government; in the past, stimulating the economy has largely been a fiscal task, with the government spending money. However, "People's Bank of China (PBOC) Governor Pan Gongsheng announced plans to lower borrowing costs and allow banks to increase their lending", suggesting that accomodatory monetary policy is now the main focus.

Facing a real risk of missing its own 5% growth target for the year, China’s central bank cut interest rates on existing mortgages by 0.5 percentage points. This change will immediately lower borrowing costs for millions of homeowners struggling under high mortgage payments. To help fuel new lending, the bank also reduced the amount of reserves that banks must hold before lending, freeing up capital for loans.

But that’s not all—China has also introduced measures to boost stock market investments, further energizing markets. On the day of the announcement, China’s stock markets surged, with the Shanghai Composite Index jumping more than 4%.

Tackling a Property Crisis

China's real estate sector has been in trouble since 2021, after the government cracked down on excessive borrowing. Many developers defaulted, leaving unfinished projects and unsold homes across the country. With homebuyers paying high mortgages on incomplete or devalued properties, consumer confidence has plummeted.

To address this, the PBOC reduced the deposit requirement for second homes from 25% to 15%. This should make it easier for potential buyers to enter the housing market, providing a much-needed boost to property sales. In total, these changes are expected to help around 50 million households, saving them about 150 billion yuan (£16 billion) a year.

Stock Market and Commodities Surge

The PBOC’s moves weren’t limited to housing. By loosening restrictions on borrowing for stock market investments, China also aimed to shore up its struggling financial markets. Shares on both the Shanghai and Hong Kong stock exchanges soared on the news, with major indexes rising over 4%.

Commodity markets also reacted to the stimulus package, with oil prices and key materials like iron ore and copper seeing sharp gains. Brent crude, a global benchmark for oil prices, rose by over 1%, while iron ore saw its biggest daily increase in over a year.

Challenges and Skepticism

Despite these bold moves, not everyone is convinced that China’s stimulus package will be enough to hit the 5% growth target. Some economists argue that the measures, while helpful, are too late and too modest. Gary Ng, a senior economist at Natixis, stated, “The move probably comes a bit too late, but it is better late than never.” Other economists argue that China will need a larger fiscal stimulus, including increased government spending.

Investment banks such as Goldman Sachs and Nomura have also lowered their growth forecasts for China, citing persistent deflationary pressures and weak domestic demand.

The Road Ahead for China’s Economy

With many challenges ahead—ranging from high household savings to a sluggish property market—China’s central bank faces an uphill battle. The global environment is also becoming more challenging, as geopolitical tensions and trade disputes with the U.S. continue to impact growth.

The immediate impact of these measures has been positive, particularly in financial markets, but the question remains: can they stimulate long-term, sustainable growth? To truly revitalize the economy, many experts argue that China will need to shift its focus toward fiscal spending, boosting consumer confidence, and addressing deeper structural issues in the property sector and beyond.

Glossary of Key Economic Terms:

1. Deflation – A decline in the general price level of goods and services, often associated with reduced consumer spending and economic stagnation.
2. Fiscal Stimulus – Government measures, typically involving increased public spending or tax cuts, intended to stimulate economic activity.
3. Interest Rate – The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan amount.
4. Monetary Policy – The process by which a central bank, such as the PBOC, controls the money supply, interest rates, and other economic factors to achieve specific economic objectives.
5. Mortgage – A loan used to purchase property, which the borrower must pay back with interest over time.
6. Property Market – The buying, selling, and development of real estate, including residential, commercial, and industrial properties.
7. Reserve Requirement Ratio (RRR) – The amount of money that banks are required to hold in reserve rather than lend out. Lowering the RRR can increase the money available for loans.
8. Reverse Repo Rate – The rate at which a central bank borrows money from commercial banks, used as a tool to manage liquidity in the financial system.
9. Stimulus Package – A set of government initiatives designed to encourage economic growth during a slowdown or recession.
10. Stock Market – A collection of markets where stocks (shares of ownership in businesses) are bought and sold.

Retrieval Questions:

1. What measures did the People’s Bank of China introduce to help the property market?
2. How did China’s stock markets respond to the announced stimulus package?
3. Why are some economists skeptical about the effectiveness of China’s recent economic measures?
4. What is the Reserve Requirement Ratio (RRR), and how does adjusting it impact the economy?
5. What long-term challenges does China face in achieving sustained economic growth?