China push to stimulate consumption may need more time

For banks, the lower mortgage rates could hurt profits in the short term.

China’s drastic fiscal stimulus measures could revive an economy weighed by weak domestic spending and a troubled real estate sector, but it might take a while to restore consumer confidence, analysts said. 

“China’s weakness stems from a crisis of confidence, not one of credit,” Harry Murphy Cruise, an economist at Moody’s Analytics, told Asian Banking & Finance in an email. “Firms and families don’t want to borrow, regardless of how cheap it is to do so. In that sense, the lower borrowing costs won’t shift the needle too much.”

China’s central bank on 24 September announced a plan to cut the amount of cash that banks must hold as reserves — known as reserve requirement ratios — by 50 basis points, which is expected to inject over $140b in liquidity to the market.

The People's Bank of China will also lower the seven-day repo rate by 0.2 percentage point to 1.5%, as well as interest rates on existing mortgages by 0.5 percentage point on average, which could provide some relief to households in the world’s second-biggest economy.

But lowering mortgage rates could hurt banking profits in the short term, Winnie Wu, chief China equity strategist and co-head of China equity strategy at Bank of America (BofA), said in an interview.

“Lowering the downpayment will [also] reduce the risk buffer on mortgage loans and increase credit risk,” she added.

On the other hand, China’s nosediving economy is a bigger risk for the banking sector in the long term, she pointed out.

“This policy-easing could drive a turnaround in consumer confidence and in the stock market,” Wu said. “Later — with other fiscal and reform policies that can help stabilise China's economy, property prices and household income — it will actually help banks in the long term.”

Wu said China needs an expansionary fiscal policy to deal with deflation that is weighing on companies, adding that local governments should increase their leverage.

China plans to issue $284.8b (CNY2t) in sovereign bonds this year, in part to subsidise consumer purchases and child support, according to media reports. That breaks away from a decades-old policy framework that many economists say has relied too much on investment in property, infrastructure and industry at the expense of consumers.

Cruise said the stimulus would have little impact in the short term, but the easing sends a signal that more support is on the way. Fiscal support in the first eight months of 2024 had been lacking, with total government spending down 3% from a year earlier. 

“The central government is hesitant to spend big, worried that old-school bazooka spending could exacerbate debt risks and delay the economy’s necessary transition away from real estate,” he said.

On a brighter note, officials have signalled their desire to lift the economy in the second half. Local government special bond issuance has jumped in the past two months after a lacklustre first half.

“The proceeds of those sales should give the economy a little sugar hit to end the year,” Cruise said, noting that about CNY1.4t in new bonds is slated for the last four months of 2024. 

Cruise expects this to be accompanied by a broader program of support from the central government. 

“In fact, some of it has already started,” he said. He noted that in late September, officials announced one-off cash handouts to people in extreme poverty and an expansion of social security benefits for college graduates who haven’t found a job two years after leaving school.

With more stimulus and support programs, China’s financial market can turn around in the next six to 12 months.

“There's certainly a number of issues that haven't been addressed, but hopefully [the stimulus] suggests some sort of pivot, and we will start to see more of similar policies coming, and more to address the fundamental economy,” Wu said.