China announces reserve requirement and repo rate cuts to boost economic growth

Beijing: The People’s Bank of China (PBOC) announced plans to reduce the reserve requirement ratio (RRR) for banks by 50 basis points, as part of efforts to stimulate the economy amid deflationary pressures. PBOC Governor Pan Gongsheng revealed the decision at a press conference on Tuesday but did not specify the exact timing, stating the cut would occur "in the near term." He added that another reduction of 0.25 to 0.5 basis points could be possible by the end of the year.

Pan also announced a 20 basis point cut to the 7-day repo rate, a key short-term rate used to manage liquidity. This move was deemed significant by market analysts, with Lynn Song, chief economist for Greater China at ING, calling it the most crucial development from the conference. Song noted that while markets anticipated smaller cuts, the larger-than-expected reduction indicated a bolder approach by the central bank.
However, the RRR cut, aimed at improving market sentiment, may not significantly impact lending as the core issue is limited demand for borrowing, not liquidity shortages, according to Song.

During the press conference, Pan hinted at a possible 0.2-0.25% reduction in the loan prime rate (LPR), which affects corporate and household loans, including mortgages. This follows last week’s decision by the PBOC to keep its main benchmark lending rates unchanged. Additionally, Pan outlined further support for the property market, including extending policies by two years and reducing interest rates on existing mortgages.

The press conference, which came shortly after the U.S. Federal Reserve cut interest rates, highlighted China’s flexibility to ease its monetary policies to stimulate growth. The country's 10-year government bond yield hit a record low of 2% during Pan’s remarks.

Analysts believe these steps, taken together, represent meaningful progress, with further easing measures anticipated in the months ahead. A combination of monetary and potential fiscal policies could help boost economic momentum heading into the fourth quarter.

Pan, who became PBOC governor in July 2023, had previously signalled the possibility of an RRR cut, which had been widely expected. Unlike the Federal Reserve, the PBOC utilises multiple rates to manage monetary policy, reflecting the broader government-led approach to economic planning.