#MacroFriday: China's 'whatever it takes' moment
What a week it’s been for China! After the People’s Bank of China (PBOC) announced substantial monetary easing plans, the Politburo on Thursday followed up with promises of strong fiscal policy measures aimed at reviving the Chinese economy. After years of making only small supportive adjustments, it seems they are now bringing a bazooka to the table. Could this be China’s ‘Whatever it takes’ moment?
The combination of the strict zero-COVID policy, a crackdown on debt-laden real estate developers, and three years of declining property prices has left Chinese consumers in a cautious mood. Chinese growth has long been export-driven, but with advanced economies expected to see sluggish growth, hitting the 5% growth target in 2024 will be a challenge. However, both the PBOC and the Politburo are now signaling that they are committed to achieving that target, stabilizing the real estate sector, and boosting consumer confidence. It’s giving us a ‘Whatever it takes’ vibe.
The PBOC has announced a significant 20bp cut in its 7-day reverse repo rate, alongside a 0.5% reduction in the reserve requirement ratio (RRR), now set at 9.5%. This is expected to inject 1 trillion RMB in liquidity. They’ve also taken steps to boost the Chinese stock markets. Since the PBOC’s announcement, Chinese equities have surged by more than 10%, erasing their year-to-date losses. While the Politburo has pledged to take fiscal action, details on the scale and scope remain unclear. However, their guidance indicates that this is just the beginning, with more announcements expected in the coming months. Still, these moves highlight the precarious state of the Chinese economy.
That said, these measures don’t guarantee a turnaround for the economy. If consumer sentiment remains weak and credit demand limited, consumption and real estate investment will likely struggle to gain traction. As 2024 is the year of the dragon, one thing is clear: You can lead a dragon to water, but you can’t make it drink!