China's new economic policy blitz provides a keel of strength amid choppy seas
On Wednesday, Chinese and US central banks took different directions to address the risks posed by trade tensions. The People's Bank of China met the challenge head on with a comprehensive stimulus package that included cuts in interest rates. The US Federal Reserve, however, backed away from a preemptive rate cut despite voicing concerns about inflation and slower growth.
In China, a powerful triumvirate of the central bank, the National Financial Regulatory Administration and the China Securities Regulatory Commission held a joint press conference to unveil a package of policies to expand credit, shore up markets, bolster smaller companies and stabilize the property market, among other measures.
The policy announcement was reminiscent of September 24, 2024, when China announced a comprehensive package of financial policies aimed at stabilizing the economy, boosting market confidence and supporting long-term growth.
As a result, the Shanghai Composite Index of stocks surged 21.37 percent in the five trading days between September 24 and 30, before closing for the weeklong National Day holiday. When markets reopened on October 8, both Shanghai Composition Index and Shenzhen Composite Index edged up, bringing trading volume to a new record of 3.45 trillion yuan (US$474.38 billion).
The Hang Seng index in Hong Kong gained about 26.66 percent in roughly two weeks.
Wednesday's announcement had a more muted effect on markets, with gains on the composite index below double digits.
Professor Wang Ying from the Institute of World Economy at Shanghai Academy of Social Sciences elaborated on the impact of the policy blitz ahead of this weekend's talks in Switzerland between Chinese and US economic officials.
Q: The timing of the policy announcements is interesting and perhaps also significant?
A: Yes, the timing was carefully selected. The announcements came before markets opened and after the five-day May Day holiday, indicating a serious readiness to respond to internal and external economic changes with a rich policy toolkit and space for further moves in the future.
China and US are engaging in trade talks this coming weekend, and it was important to lay a solid domestic foundation to strengthen negotiation leverage. The announcements showed the government takes stocks, bonds and foreign exchange markets very seriously and will support people's livelihoods and the development of enterprises. It's all a confidence booster.
Q: The press conference and the bucket of financial initiatives are reminiscent of the policy announced on September 24, 2024. What are the similarities and differences?
A: As to similarities, both share consistent goals and a focus on stabilizing growth, markets and expectations. Both aim to ensure steady and sustainable economic progress amid complex conditions.
Both adopt a combination of short-, medium- and long-term policy measures. For example, the Chinese government on September 24, 2024 introduced guidelines to promote long-term capital market participation, while this week, it proposed accelerating new financing systems aligned with new real estate development models.
As to differences. Well, first of all, the economic environment isn't the same. Last September, China was facing insufficient domestic demand and weak social expectations. This time, the nation is dealing with external shocks, notably the significant US tariffs on imports.
The policy focus also differs. Last September's policy package was aimed at quickly boosting market confidence and expanding domestic demand with more direct, powerful measures – significant cuts in deposit and lending rates as well as mortgage rates for new houses. This time, in addition to stabilizing real estate and stock market expectations, the policy also aims to boost consumer spending and support enterprise financing and technological innovation.
Q: What elements of this week's announcement are especially worth noting or exceeded expectations?
A: In quantitative monetary policy, this week's 0.5 percentage point cut in the reserve requirement ratio for banks was expected, but more targeted rate cuts went beyond the traditional scale.
Temporarily reducing the ratio on auto finance and financial leasing companies to zero from 5 percent is a first for China. The policy would surely enhance credit supply and drive up demand for autos purchases and equipment investment.
In terms of price-based monetary policy, the 0.25 point cut in the interest rates on housing provident fund loans exceeded expectations and signals more rapid implementation of the Politburo's April directive to "consolidate the stable development of the real estate market."
In terms of structural monetary policy, the introduction of "technology innovation bond risk-sharing tools" will provide tech firms with more convenient, efficient and lower-cost incremental capital. It will also encourage more equity investments, corporate bonds, loan credit support and listings in the capital market.
Among financial regulation policies, there's a 60-billion-yuan expansion in a pilot project allowing insurance company's participation in stock markets. That was beyond expectations. Policymakers also lowered the "risk reserves" required for insurers' to invest in stocks by 10 percentage points. That will bring more insurance companies into stock markets and provide a stabilizing force.
In terms of capital market policies, the commitment to fully support the role of Central Huijin Investment, which is a unit of China's sovereign wealth fund, as a quasi "stabilization fund" is a market confidence booster with long-term capital.
Q: What's the policy impact on the business sector?
A: The cut in the reserve ratio requirement and key interest rates will stimulate corporate investment by lowering loan rates below rates of investment returns.
In the first three months of 2025, non-state investment grew by 0.4 percent from a year earlier, indicating a rebound in private sector investment, particularly in infrastructure and manufacturing. This latest round of interest cuts will further that trend.
Various refinancing policies will directly help companies facing challenges. Increased refinancing quotas of 300 billion yuan for technology innovation and 300 billion yuan for agricultural and small businesses will ease liquidity constraints and also reduce financing discrimination against smaller enterprises to some extent.
There are also policy measures for the banking and insurance sectors to support foreign trade, which will help export-related companies weather tariff shocks and complement provincial and municipal tax relief and subsidies.
Q: What impact do you see on investment?
A: Fixed-asset investment in the first quarter rose 4.2 percent from a year earlier to 10.32 trillion yuan, with 0.4 percent growth in private investment, 9.1 percent growth in the manufacturing sector and 5.8 percent growth in infrastructure investment.
That indicates solid growth in investment and a good start for the year, and that's down to the effects of previous policies stimulating domestic demand. The new package of policies will further stimulate that investment by lowering financing costs and easing credit constraints. Refinancing policies will also help enterprises invest and expand, helping innovation and business growth.
Q: And how will these new policies affect households?
A: The rate cut in housing provident fund loans will boost sentiment toward homebuying and complement central and local supportive measures enacted last year, including lower down payments and tax incentives.
In the first quarter of 2025, mid- and long-term loans – primarily housing mortgages – rose by 883.2 billion yuan, relatively rapid growth. The new round of policies will reinforce the stabilization of the property market.
Refinancing tools for the services sector and elderly care will help boost consumer spending, especially among young people, small business owners and rural residents. The refinancing tools will encourage an upgrading of services that will increase demand for longer-term, beyond one-time subsidies.
Q: Is China facing a deflationary risk?
A: In 2024, China did have relatively low inflation. The Consumer Price Index was up 0.2 percent; prices for consumer goods fell 0.2 percent, but the price of services rose 0.5 percent. That doesn't necessarily translate into deflationary risks because China's policies to stimulate consumer spending will have obvious effects this year.
The 2024 Central Economic Work Conference highlighted strengthening domestic demand as a priority for 2025, followed by a series of consumption-boosting policies. These policies, combined with the measures announced on May 7, are expected to lead to improve domestic spending, boost consumer confidence, and, in turn, boost the core inflation rate.
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