China ramps up campaign to boost fragile economy, currency
CHINA has intensified efforts to stimulate the economy and support its currency, as investor concerns over the growth outlook persist.
The central bank will trim the amount of foreign currency that financial institutions are required to hold as reserves for the first time this year, the People’s Bank of China (PBOC) said on Friday (Sep 1).
The move came hours after authorities announced fresh stimulus for the beleaguered property sector and unveiled plans to expand tax breaks for child and parental care, as well as education.
The steps are the latest efforts to shore up confidence in the world’s second-largest economy, which is sagging under the weight of the persistent housing crisis, waning global demand and rising unemployment.
Authorities have so far resorted to a drip-feed of targeted measures, avoiding the big-bang stimulus approach they deployed during the 2008 global financial crisis amid concerns over elevated debt levels.
“The policy package exceeds market expectations,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group. “Confidence will be boosted in the near term. We still need more evidence to confirm if it marks a turnaround.”
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Financial institutions will need to carry just 4 per cent of their foreign exchange deposits in reserve starting Sep 15, the PBOC said, compared to the current level of 6 per cent. The move effectively boosts the amount of foreign currency available in the local market, making it relatively more appealing for traders to buy the yuan.
The offshore yuan rose 0.3 per cent to around 7.255 per US dollar after the news. A gauge tracking Chinese property developers gained as much as 2 per cent, while the broader CSI 300 Index climbed 0.8 per cent. Hong Kong’s stock market was closed due to a typhoon.
China’s currency slid towards its weakest level since 2007 against the US dollar in August, after a surprise interest-rate cut failed to boost investor sentiment damaged by ongoing economic weakness. It has fallen around 5 per cent this year amid the nation’s widening rate divergence with the US, and is among Asia’s worst performers next to the Japanese yen and the Korean won.
The PBOC has ramped up support for the currency, via tools such as setting a stronger-than-expected daily reference rate, prompting state banks to sell US dollars, and tightening offshore yuan liquidity to squeeze shorts.
“As the yuan is the anchor of all the asset classes, authorities are trying to stabilise the broader financial markets through the measure,” said Hong Hao, chief economist of Grow Investment Group. Together with stronger-than-expected yuan fixings and the PBOC’s issuance of offshore bills, the cut to FX reserve requirements shows that the central bank cares about the 7.3 level for the yuan, he said.
Recent economic data has shown signs of improvement. A Caixin survey of China’s manufacturing activity unexpectedly expanded in August, figures showed on Friday. The data came a day after the official manufacturing purchasing managers’ index showed the contraction in activity easing in August as new orders and production improved.
To boost demand in the property sector, authorities moved to allow the largest cities to cut down payments for homebuyers and encouraged lenders to lower rates on existing mortgages. The moves may help homeowners save at least tens of billions of yuan in annual interest payments and stimulate consumption, according to state media reports.
Ending the two-year housing slump is seen as key to reviving growth, because the sector and related industries make up about a fifth of the economy. Underscoring the challenge, sales by the country’s largest developers fell 34 per cent in August from a year earlier, a report showed on Thursday, and Country Garden Holdings – the former No 1 – is on the brink of default.
Another former property giant, China Evergrande Group, said its money-management arm could not make payments for investment products this month due to a liquidity crunch.
On the tax front, China unveiled steps on Thursday to increase personal income tax deductions for child care, parental care and children’s education spending. They are the latest steps to address the country’s rapidly changing demographics and boost household consumption.
“Policy momentum is clearly picking up,” Citigroup analysts including Yu Xiangrong wrote in a note. “This macro backdrop could be more supportive for China assets.”
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