The People’s Bank of China announced policy changes Thursday to allow domestic banks to expand lending, but the nationwide economic slowdown has left many businesses and households cautious about borrowing.
The move is the latest in a series of economic stimulus measures by the Chinese government, which has seen growth fail to rebound as strongly as many expected this year despite nearly three years of strict anti-pandemic restrictions. Other measures taken to shore up borrowing and spending include a government-led interest rate cut in June and a series of rate cuts on many bank loans last month. Policymakers in some of China’s largest cities have taken steps to make home loans easier to obtain by lowering down payment requirements.
The dilemma for banks is that many companies are facing weak sales and are reluctant to borrow further. And as the country’s housing market slumps, many households are paying off existing mortgages and fewer are taking out new mortgages to buy new apartments.
Banks have found themselves under pressure to lend money by buying bonds from heavily indebted states and local governments that need to pay for big infrastructure projects to create jobs. . A large amount of government bond issuance is already planned in the coming weeks.
The Chinese government is also encouraging banks to continue lending to some property developers. More than 40 real estate companies have defaulted on their bonds or failed to make payments, leaving them unable to borrow on overseas bond markets, shocking overseas investors.
Becky Liu, a strategist at Standard Chartered, said in a statement that while the central bank had been expected to act, the timing was sooner than expected. He said the regulatory action could lead to further interest rate cuts in the coming months.
The central bank, the People’s Bank of China, said in a statement that the aim is to “strengthen the foundations of economic recovery and maintain reasonable and sufficient liquidity.”
The bank reduced the amount of money the country’s commercial banks had to hold in reserves, freeing up funds for lending. The central bank cut the so-called reserve requirement ratio for much of the banking system by a quarter of a percentage point.
The central bank announced the changes would take effect on Friday, a fast-tracked timeline. Investors and economists will be watching Friday for the release of broader data on the health of the economy in August.
The National Bureau of Statistics is scheduled to release statistics on retail sales, industrial production, fixed asset investment, and sales prices of newly built condominiums in 70 large and medium-sized cities.