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China: What is the intention of the macroeconomic policy shift?

2024-10-02

■ China has continuously released economic countermeasures, and fiscal and monetary policies have been significantly relaxed
■ This reflects the government's and the central bank's belief that the current economic downturn may lead to long-term stagnation and continued price declines.

   Today is the National Day of the 75th anniversary of the founding of the People's Republic of China. Since last week, China has successively released economic countermeasures, and the government and the People's Bank of China have clearly expressed their attitude toward supporting the economy. On September 24, the People's Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), and the China Securities Regulatory Commission (CSRC) jointly issued financial easing policies and comprehensive financial support measures for the real estate market and capital market.
   In terms of monetary policy, (1) the 7-day reverse repurchase rate was reduced by 0.20 percentage points and replaced the loan prime rate (LPR) as the new primary policy rate, and (2) 0.50 percentage points reduced the deposit reserve ratio. This move is expected to inject 1 trillion yuan of long-term liquidity into the financial market. Pan Gongsheng, governor of the central bank, said that depending on the situation, the interest rate may be further reduced by 0.25-0.50 percentage points this year. At the same time, it was announced that the coverage of loans to support the capital turnover of small and medium-sized enterprises would be expanded, and the loan term would be extended to September 30, 2027.
   In terms of measures to support the real estate market, it is proposed to reduce the interest rate of existing housing loan contracts by 0.5 percentage points, reduce the minimum down payment ratio for first-time home buyers to 15%, increase the central bank's guarantee ratio for converting inventory housing into affordable housing (from 60% to 100%), and provide financial support for repurchasing land inventory from real estate developers. Regarding measures to support the capital market, (1) a swap system is introduced for securities companies, fund companies, and insurance companies, and (2) a central bank refinancing system is established for listed companies and significant shareholders. Under measure (1), the PBOC will provide 500 billion yuan of funds with qualified financial assets as collateral, and under measure (2), 300 billion yuan of financing will be provided to companies for self-purchase of stocks. In addition, the PBOC also announced plans to offer guarantees to support funds for small and medium-sized enterprises, the real estate market, and the capital market and to increase the core tier 1 capital (core capital under bank supervision) of the six central banks to maintain the stability of the financial system. According to media reports, the government is considering injecting up to 1 trillion yuan of capital.
   At the Political Bureau of the Central Committee meeting on September 26, it was indicated that an active fiscal spending policy would be adopted. Previously, budgetary and monetary policies took targeted measures while maintaining economic restructuring, but now policies will be significantly relaxed to achieve the growth target of "around 5%". The introduction of comprehensive financial support measures for the real estate market and capital markets reflects that the government and the central bank believe that the current economic downturn is not due to short-term demand shortages caused by structural reforms but debt deflation (long-term economic stagnation and continued price declines caused by high debt and falling asset prices). The emphasis on asset prices shows that policies address the root causes of the vicious cycle rather than catering to short-term public sentiment.

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