The People’s Bank of China (PBoC) has announced a series of measures to revive the economy, which has been dragged down by persistent weakness in domestic demand and the decline in the real estate sector.
PBoC Governor Pan Gongshing announced policy steps at a press conference, ranging from cutting the reverse repo rate to reducing reserve requirement ratios and lowering mortgage rates.
Pan announced that the PBoC lowered the 7-day reverse repo rate, the PBoC’s main tool for injecting short-term cash into the market, from 1.7 percent to 1.5 percent.
Pan said they expect the rate cut to reduce the PBOC’s main policy rate, the 1-year lending rate (MLF), to 0.3 percent, while they also expect it to reduce the 1- and 5-year lending rates (LPR), which serve as benchmark rates for real estate loans and corporate loans, by 0.2 percent and 0.25 percent.
In reverse repo transactions, the Central Bank transfers cash to the market by purchasing securities to sell back at a later date.
The MLF allows Chinese banks to obtain medium-term loans from the central bank in exchange for their securities.
The LPR, determined by 18 banks in China based on the profit share declarations they put on the borrowing interest rate of the Central Bank, has served as the country’s benchmark interest rate since 2019. The 1-year loan interest rate is accepted as the reference for corporate loans, while the 5-year interest rate is accepted as the reference for real estate loans.
REQUIRED RESERVATION RATIOS WILL BE REDUCED
Pan also said the PBoC will reduce the reserve requirement ratios imposed on banks and lenders by 50 basis points “in the near future.”
Underlining that the step in question aims to provide sufficient cash to the market, Pan said they expect the reduction to free up 1 trillion yuan (about $140 billion) in cash assets.
Pan also stressed that they may reduce reserve requirement ratios by an additional 25 to 50 basis points during the year, depending on the liquidity situation in the market.
While a separate reserve requirement ratio is applied for each financial institution in China, it is calculated that the weighted average of reserve requirement ratios will decrease to 6.6 percent following the decision.
The People’s Bank of China last cut reserve requirement ratios by 50 basis points on Feb. 5. The bank made two 25 basis point cuts in 2022 and 2023.
DISCOUNT ON MORTGAGE INTERESTS
Pan also said that as a measure to revive the declining real estate market, they will reduce the interest rates on existing housing loans to the same rate as new loans.
Pan, who pointed out that the average discount on housing loans would be 0.5 percent with this step, said, “The new policy will affect 50 million households and 150 million people. The new rates will reduce households’ loan interest expenditures by about 150 billion yuan ($21.32 billion) per year, contributing to the revitalization of consumption and investment.”
Pan noted that the minimum collateral for real estate loans has been reduced to 15 percent for second-hand homes, as is the case for first-hand homes.
The Chinese government announced on May 17 that it would provide 300 billion yuan ($42.64 billion) to local governments to purchase affordable housing to reduce the number of completed but unsold houses.
Stating that the plan aims to melt the housing stock and revitalize the real estate sector, Pan emphasized that the rate of financing to be provided by the PBoC will be increased within the scope of the plan.
Following Pan’s statements, the Hong Kong Stock Exchange’s Hang Seng index and Shanghai composite index gained 3.6 percent.
