Commentary: China’s Stimulus Package Exceeds Expectations, but What Comes Next?

The stimulus package unveiled on Tuesday to bolster China's economy introduced more extensive easing measures than anticipated, aiming to address liquidity pressures across different economic sectors [para. 1]. The real estate downturn since 2022 has led to fluctuating but weak domestic demand, exacerbated by increasing real interest rates and contracted market liquidity [para. 2]. Financial conditions have tightened, with significant year-on-year declines in M2, M1, and social financing. Liquidity-sensitive assets, including small and mid-cap stocks and credit bonds, have underperformed, while market activity has waned evidenced by the decrease in A-share trading volumes to around 500 billion yuan since August and a decline in active bond trading frequency [para. 3].

The Federal Reserve's rate cut has narrowed the interest rate gap between the U.S. and China, reducing capital outflow and easing depreciation pressure on the yuan, thereby allowing more flexible Chinese monetary policy [para. 4]. The announced easing measures include reserve requirement ratio cuts, interest rate reductions, and targeted monetary tools, exceeding market expectations [para. 5][para. 6]. The stimulus aims to address liquidity pressures in five areas: banks, households, the real estate sector, the stock market, and small and medium-sized enterprises (SMEs) [para. 7].

For banks, the measures entail significant reserve requirement and interest rate cuts, to address liquidity pressures from increased government bond issuance and deposit relocations, indicated by a rise in interbank certificate of deposit issuance and rates [para. 8]. The government plans to inject between 1 trillion and 2 trillion yuan in long-term liquidity and reduce various interest rates, such as a 20 basis points cut in the 7-day reverse repo rate, a 30 basis points cut in the one-year medium-term lending facility (MLF), and a 20 to 25 basis points cut in deposit rates, thereby alleviating cost pressures on bank liabilities [para. 9].

For households, existing mortgage rates will be lowered as core inflation falls and high nominal interest rates curb consumer spending and increase liquidity pressures. The reduction by about 50 basis points is expected to save families around 150 billion yuan annually in interest payments [para. 10]. The reduction in interest rates and the subsequent decrease in the Loan Prime Rate (LPR) will further ease the interest burden on both existing and new mortgages when they are repriced in January [para. 11].

The relending program for subsidized housing will be optimized to support property companies, extending previous policies to assist developer’s financial needs until the end of 2026. The central bank will also offer a 300-billion-yuan loan initiative for state firms to buy unsold homes and turn them into affordable housing [para. 12][para. 13]. For the stock market, the central bank is establishing two tools to encourage financial institutions and listed companies to increase their stock holdings [para. 14].

The equity investment pilot program and loan renewal policies will be optimized to support SMEs, broadening eligibility and refining assessments to enhance liquidity for startups and small companies [para. 15]. The interest-free loan renewal policy will be extended to all small micro-enterprises and eventually include medium-sized enterprises, aiming to improve liquidity for both small and medium-sized companies [para. 16].

Following the policy announcement, A-shares and black commodities surged, although bonds pulled back, especially credit and ultra-long-term bonds, indicating improved market expectations [para. 17]. The second quarter’s export decline and lack of domestic demand stressed the need for stronger policy responses, and the new policies substantially exceeded market expectations in pace, intensity, and approach [para. 18][para. 19]. These measures have led to a highly optimistic market sentiment, renewing interest in risk assets and anticipation for potential fiscal easing [para. 20][para. 21][para. 22].

Zhou Junzhi, a chief macro analyst at China Securities Co. Ltd., noted that aligning financial powers and responsibilities at the county level might require patience for immediate fiscal stimulus [para. 23][para. 24][para. 25].

The views expressed are personal opinions and do not necessarily reflect Caixin Media's editorial positions [para. 26].