To tackle its slowing economy and halt the downward spiral of its housing market, China’s central bank, the People’s Bank of China (PBOC), recently unveiled a set of significant measures aimed at making it easier for households and companies to borrow money. The bold moves reflect the Chinese government’s concern over the sluggish economic growth and broad price declines that have characterized the post-pandemic period. However, experts caution that these steps may not be enough on their own to reverse the slowdown.
At the heart of the PBOC’s strategy is a reduction in key interest rates. The benchmark seven-day interest rate has been cut to 1.5 percent, down from 1.7 percent, in an attempt to stimulate borrowing. Additionally, commercial banks have been allowed to reduce their reserve requirements, which will free up around $140 billion for lending to businesses and households. These measures are intended to encourage more borrowing, but the impact will depend on whether businesses feel confident enough to take on additional debt.
The PBOC also lowered minimum down payments for second homes, which are commonly bought as investments, from 25 percent to 15 percent of the property’s value. This move aims to stimulate demand in the housing market, which has been severely depressed. Home prices in China have fallen by about 10 percent annually over the last three years, undermining confidence in the real estate sector—a cornerstone of Chinese household wealth. For many families, property represents over two-thirds of their assets, and the market’s decline has led to a significant reduction in consumer spending.
To further support the housing market, the PBOC authorized banks to cut interest rates on existing mortgages, reducing the financial strain on homeowners. Mortgage rates could fall below 4 percent for some borrowers, which is intended to ease the burden on households while stimulating economic activity. However, these cuts will also squeeze the revenues of China’s commercial banks, leading the central bank to permit lower interest rates on deposits to help balance their books. This could, in turn, incentivize more consumer spending as saving becomes less attractive.
The stock market reacted positively to the PBOC’s announcements, with Chinese shares climbing by over 4 percent. However, while financial markets may be buoyed, broader economic concerns persist. Surveys indicate that many businesses are reluctant to borrow even at reduced interest rates, as they remain uncertain about future sales and their ability to repay loans. The ongoing struggles of the property sector, with numerous developers facing collapse, have further dampened business and consumer confidence.
In light of these challenges, experts suggest that more may be needed to jumpstart growth. While the central bank’s actions are an important step, some economists argue that fiscal support from the national government is crucial. They recommend that China’s government take on more debt to fund infrastructure projects and direct stimulus to boost the economy—a strategy that could complement the PBOC’s monetary easing efforts.
Whether the central bank’s measures will provide the needed economic lift remains uncertain. With declining home prices, weak consumer spending, and cautious businesses, it may take a combination of further monetary easing and increased fiscal support to fully revive China’s economy.