China’s central bank took the markets by surprise today with a second monetary stimulus this week aimed at boosting its faltering economy. The People’s Bank of China (PBoC) reduced its one-year loan rate by 20 basis points, following a previous cut to the short-term rate on Monday.
State media reported that today’s liquidity measures reflect the PBoC’s commitment to providing adequate liquidity and supporting economic recovery. Additionally, China has doubled its subsidies for consumers replacing old cars, with new policies from the National Development Reform Commission and the Ministry of Finance focusing on large-scale equipment renewal and trade-in schemes. Consumers will receive double the previous subsidies for trading in old vehicles, with extra incentives for new energy passenger vehicles like electric cars.
Despite these moves, stock market sentiment remained subdued, with Shanghai and Hong Kong indices falling by 0.5% and 1.8%, respectively, and the pan-continental Asia Dow decreasing by 2.6%.
Kathleen Brooks, research director at XTB, remarked that while the two rate cuts this week signal a moderate easing, they are unlikely to significantly boost the Chinese economy or consumer spending. She noted that the central bank’s actions reflect a new urgency to support the economy in light of recent disappointing economic data.
Julian Evans-Pritchard at Capital Economics highlighted that the PBoC’s decision was notable for being twice as large as usual rate adjustments and for its timing, as rate changes are typically made on the 15th of each month. He suggested that the central bank’s accelerated action indicates a shift in policy strategy prompted by lackluster market reactions to recent economic developments.
Duncan Wrigley at Pantheon Macroeconomics suggested that the PBoC’s recent decision aligns with a broader context where falling global tech stocks may lead to anticipated Fed rate cuts, giving China room to ease policy without risking currency instability. He noted that while the central bank’s willingness to adjust rates in more significant increments is positive, the current cut might not be enough to significantly boost credit demand and may require further easing.
Despite the rate cut, the renminbi strengthened notably against the US dollar, with both onshore and offshore rates rising more than 3%. Large state-owned banks also announced coordinated reductions in deposit rates for one- and two-year terms. The recent policy changes are seen as incremental rather than transformative, with expectations for further targeted support in the upcoming Politburo meeting to address China’s sluggish growth.
