China rolled out a raft of measures today aimed at countering a prolonged downturn in its property market that is weighing on the world’s second largest economy.
The chief of China’s central bank said it would cut the amount of reserves banks are required to keep. It also slashed interest rates on its loans to commercial banks, reduced required down payments for some property purchases and promised other moves to revive the slowing economy.
Disruptions and job losses during the COVID-19 pandemic, coupled with falling prices for homes, have left many Chinese unwilling or unable to spend, despite government efforts to encourage purchases of homes, electric vehicles and other big-ticket items.
People’s Bank of China Gov. Pan Gongsheng told reporters in Beijing that the reserve requirement for banks would be cut by 0.5 percentage points “in the near term,” and that the central bank would follow up with further cuts. That would free up more money for lending.
The news lifted share prices, especially for real estate developers. Hong Kong’s Hang Seng index jumped 4.1%, while the Shanghai Composite index was up 4.2%.
Regulators also plan new policies to stabilize the stock market, Pan and other officials said. Stock prices in China peaked before the global financial crisis in 2008 and have mostly flatlined since then.
Analysts said the latest, coordinated approach to supporting the property sector might be more effective than earlier, piecemeal efforts that so far had brought only scant relief. The Federal Reserve’s half-a-percentage point rate cut last week also alleviated pressure on the Chinese yuan, giving the PBOC more leeway to act.
It’s “a step in the right direction,” Julian Evans-Pritchard of Capital Economics said in a commentary. “But it will probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support,” he said.
Unlike the U.S., where inflation due to a hot economy has been the main preoccupation of policymakers in recent years, China has been contending with slowing growth and downward pressure on prices due to slack demand.
The housing market has floundered after authorities cracked down several years ago on excessive borrowing by developers, leading many to default on their debts and to fail to deliver apartments buyers had already paid for.
Housing is a main form of investment in China and it also supports many other industries, such as construction, home decorating and home appliances, among others.
China’s regulators have avoided the kind of massive government spending packages Beijing used in the past to rev up growth, wary of creating a property market bubble. But disruptions and job losses during the COVID-19 pandemic, coupled with falling prices for homes have left many Chinese unwilling or unable to spend, sapping the economy of other engines driving business activity.
The economy grew at a 4.7% annual rate in the last quarter after expanding 5.3% in the first three months of the year. Recently, Chinese leader Xi Jinping urged officials to do more to get growth back on track.
Although markets reacted enthusiastically to the flurry of policy measures, some economists were skeptical.
“The package is encouraging, but insufficient to put a floor under the property market and wider economy. A substantial nominal growth slump is baked in,” Rory Green and Freya Beamish of TS Lombard said in a commentary.
Pan, the central bank governor, said down payment requirements for buyers of second homes would be reduced to 15% from 25% and that interest rates for mortgages would be cut by about 0.5% .
That would help 50 million households and 150 million people, reducing household interest expenses by an average of about 150 billion yuan ($21 billion) a year, he said.