10 trillion yuan stimulus package expected to follow 9-24 monetary policy loosening
Chinese central bank to cut reserve ratio and policy rates. Li Xunlei says Beijing needs to dramatically increase leverage to boost economy.
Our briefing on critical economic and financial developments in China as of Friday, 27 September, 2024.
The Chinese central bank's 9-24 credit loosening is expected to pave the way for 10 trillion yuan in fiscal stimulus, which will help to deal with "Washington's containment strategy."
Full details on the Chinese central bank's monetary policy and credit expansion plans unveiled by governor Pan Gongsheng on 24 September.
Economist Li Xunlei wants the Chinese central government to take on far more debt and issue 50 trillion yuan in ultra-long-term treasuries in a decade, to deal with what he believes to be an unprecedented slump in China's stock and property markets.
China's 9-24 monetary policy loosening paves way for 10 trillion yuan fiscal stimulus: Ren Zeping
Leading economist Ren Zeping (任泽平) believes the recent round of mass loosening measures unveiled by the Chinese central bank is paving the way for fiscal stimulus of at least 10 trillion yuan.
On 24 September, the State Council made the landmark move of convening a joint press conference with all of China's top financial regulators, for the purpose of unveiling a round of monetary and capital market measures designed to resuscitate the economy's flagging growth.
Key measures from the People's Bank of China (PBOC) - being the Chinese central bank - included:
Reductions to the reserve requirement ratio of around 0.5 percentage points, which is expected unleash 1 trillion yuan in long-term liquidity.
Reductions to PBOC's policy rate by 20 basis points.
Reductions to the rates for China's outstanding mortgages, bringing them in line with new mortgages benefiting from credit loosening measures announced in May of this year.
Ren now expects follow-up fiscal stimulus measures worth around 10 trillion yuan, following calls from numerous Chinese economists including Ren himself.
"Monetary policy has exhausted itself, and we await fiscal policy and property policy, and the coordinated release of a raft of large-scale economic stimulus," Ren writes.
"The scale for the raft of measures to revive market confidence is at least 10 trillion yuan."
Ren says this will involve the release of four to five trillion yuan in ultra-long-term bonds, used to alleviate the debt and fiscal pressures of local governments, as well as the burden of enterprises encumbered by late payments.
Three to five trillion yuan could also go towards housing and property measures, or investment in infrastructure, new energy and "new quality productive forces."
"Our country has huge economic potential, and despite the economic challenges it faces being severe, they are also provisional, and the methods we have at our disposal are greater than the problems," Ren writes.
"We only need to adopt vigorous measures that combine short and long-term remedies, in order to re-start the path of economic recovery and invigorate confidence.
"Strong economic growth and employment is fundamental to dealing with US strategic containment."
What the Chinese central bank said on 24 September
The announcements made by Pan Gongsheng (潘功胜), governor of the Chinese central bank, on 24 September are part of a raft of key macro-economic and financial measures coordinated by Beijing to boost China's economy.
According to Pan, key focal areas for the central bank are set to include:
Guiding commercial banks to reduce the rates for outstanding home loans to levels for new home loans. Average levels are expected to fall by around 0.5 percentage points. Pan said that while reducing outstanding mortgage rates will reduce bank interest revenues, it will also forestall advance repayments.
Standardisation of the minimum down payment for first and second home loans. Second-home loan down payments are set to fall to 15% from 25% at present.
Potentially reducing the reserve requirement ratio a further 0.25 - 0.5 percentage points. Pan says a 0.5 percentage points reduction earlier in the year released around 1 trillion yuan in long-term liquidity. A subsequent cut could reduce the reserve ratio to 8% from 8.5% for large-scale commercial banks, and to 6% from 6.5% for medium-sized banks. Pan also pointed to further space for cuts given that these rates are still comparable to international levels. According to Pan, the reductions are "equal to the bank directly providing low-cost, long-term funds" to the financial system.
Reducing the policy rates for the central bank's open market operations (OMO) instruments. The rate for the 7-day reverse repo is set to decline 0.2 percentage points, from 1.7% to 1.5%. This is expected to drive a subsequent 0.2 - 0.25 percentage point decline in the benchmark loan prime rate (LPR) as well as bank deposit rates.
Guiding coordinated declines in loan rates and deposit rates. Pan said this measure is for the purpose of maintaining the stability of the net interest margins of commercial banks, and supporting their profitability.
Increasing the central bank's funding support ratio for the 300 billion yuan social welfare housing re-loan facility launched in May, to 100% from 60% previously. Whereas previously the Chinese central bank would pony up 6 billion yuan for every 10 billion yuan in social housing loans made by commercial banks, it will now provide a full 10 billion yuan in low-cost funds. According to Pan, this will "accelerate the process of commercial home destocking, and strengthen the market-based incentives for banks and acquirers."
Extending the two policies on business property loans and the 16 Financial Conditions (金融16条). These two policies were originally set to expire at the end of the year, but will now continue until to the end of 2026.
Stabilising the yield curve. Pan pointed to China's treasury yield curve as important source of price signalling which currently suffers from insufficient stability at the long end. For this reason, the central bank has issued risk warnings on long-term treasury yields and sought to strengthen communication with the market. According to Pan, this is for the purpose of "preventing a herd effect that leads to unilateral declines in long-term treasury yields that potentially harbour systemic risk."
Preserving the health of the Chinese bond market. "Maintaining the sound transaction order of the bond market is also a duty of the central bank," Pan said. "The central bank has recently discovered certain situations including manipulation of prices, renting out of accounts and profit transfers on the bond market. We will expand investigation and punishment of illegal and illicit conduct on the interbank bond market."
China needs to issue 50 trillion yuan in ultra-long-term treasuries to deal with "unprecedented" property and stock decline: Li Xunlei
Liu Xunlei (李迅雷), chief economist at Zhongtai Securities, says China is currently facing macro-economic challenges of an unprecedented nature.
"I've researched the macro-economy for over 30 years, but I have never before encountered this kind of situation," Li writes.
"In the past, whenever there was an economic cycle it would be short, and pass after a period.
"Now it's different - from 2021 until the present, both the property market and the stock market have continually fallen. This type of problem is unprecedented."
According to Li, the source of the problem lies in two areas - structural causes leading to excess capacity, and cyclical causes leading to insufficient domestic demand.
Li calls for mass treasury issuance and increasing central government leverage as a key means for overcoming these challenges.
"There's an asset drought, so everyone wants treasuries. The central bank has also said that treasury rates are falling too quickly, so they should issue more treasuries," Li writes.
"If every year they issue 5 trillion yuan in treasuries, then they will issue 50 trillion yuan in ultra-long-treasuries over a decade. There won't be any ramifications, there will only be positives.
"Our central government’s leverage levels are too low, at just 20%. If we issue 50 trillion yuan in treasuries, it will probably still be less than 50%.
"The US Federal Government's leverage is at 120%, so there is huge room for the Chinese central government to leverage up."