Since July 2024, the renminbi has gradually started to rebound, with an increase of about 2.5%, thanks to US rate dropped. This has certainly relieved some pressure, allowing the Chinese government to breathe a sigh of relief as it no longer needs to spend huge amounts of money to stabilize the currency. Instead, it can redirect these funds to support the Chinese market, boost domestic demand, and stabilize the housing market and stock market.
Let’s take a look at how China plans to stimulate its economy. Some describe the actions of the People’s Bank of China (PBOC) as a sweeping wave of hope to prop up the economy. We need to examine their specific strategies and whether they will be effective.
The PBOC has begun to lower the reserve requirement ratio and interest rates. Specifically, it has reduced the reserve ratio by 0.2 percentage points and has lowered policy interest rates. It has emphasized reducing interest rates on existing home loans. Existing home loans refer to the total amount of mortgage loans that are not yet fully paid off. Many of these loans were taken out when interest rates were higher, and with the current economic downturn, people are struggling to meet these mortgage payments. If people are burdened by high mortgage payments, they obviously have less disposable income for other consumption, which leads to a decline in overall consumption and economic vitality.
To address this from the source, the PBOC is making it easier for people to pay their mortgages by lowering interest rates. After a previous reduction last year, they are making further cuts to help alleviate the financial burden, allowing people to have a bit more disposable income for consumption.
Furthermore, the PBOC is introducing an innovative policy tool to support the stock market. It plans to allow securities firms, mutual funds, and insurance companies to engage in a swap facility. This means that they can buy stocks and then use those stocks as collateral to borrow money from the PBOC. With this borrowed money, they can then purchase more stocks, creating a mechanism to bolster the stock market. If stock prices are falling, they can use this facility to support their own stock prices through buybacks. This system aims to improve liquidity and potentially save the market.
Is this effective? Yes, it seems to be having an impact. The stock market has reacted positively, indicating that these measures are quite effective. The strategies employed by the PBOC in both the housing and stock markets have shown immediate results.
As for the housing market, we’ll need to observe its ongoing performance. In addition to lowering mortgage rates to encourage consumption, the government is also issuing consumption vouchers in cities like Shanghai to stimulate spending in sectors such as dining, accommodation, and entertainment, with a total allocation of 500 million yuan. The idea is that if people use these vouchers for activities like going to the movies, they might also spend on food and shopping, thus boosting overall consumption.
However, despite these efforts, a significant issue remains: consumption is still declining. Additionally, there is the problem of deflation, which is indicated by negative producer price index (PPI) numbers. To combat deflation, the PBOC needs to raise the PPI back into positive territory, which is necessary for economic recovery.
Experts note that it’s not a lack of money causing these issues, but rather a spiral of deflation where people’s incomes are falling. This leads to increased savings and decreased spending. The Chinese are known for having a high savings rate; thus, when income decreases, so does consumption, which is the root of the consumption downgrade.
Many international media outlets, including Bloomberg, attribute the economic challenges in China to this deflationary spiral rather than a lack of funds. They believe that the PBOC's recent injection of a trillion yuan into the market is a step towards stimulating the economy. However, the crucial element is restoring confidence in the economy. People are less likely to spend if they doubt their future earnings.
As we observe how the PBOC’s actions affect market confidence and whether they can continue to stimulate the economy, we note that the stock market has already begun to rise significantly.
However, it’s essential to remain cautious about whether this momentum can be sustained. If you’re looking to invest, it's advisable to be prudent as we monitor the ongoing developments.
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