China cuts key rates, RRR to support economy

Pan Gongsheng stated that on April 25 the Politburo convened to analyze the current economic situation and outline economic work. In order to implement the spirit of that meeting and further pursue a moderately loose monetary policy, the People’s Bank of China will intensify macro‐prudential control and roll out a package of ten monetary measures in three categories:

1. Quantity‐based policies, aimed at boosting medium‐ and long‐term liquidity and ensuring ample market funds:

1. Reduce the reserve requirement ratio by 0.5 percentage points, which is expected to inject roughly ¥1 trillion of long‐term liquidity into the market.

2. Improve the deposit‐reserve framework by temporarily cutting the reserve requirement ratio for auto‐finance companies and financial‐leasing firms from 5 percent to 0.

2. Price‐based policies, comprising cuts to key policy rates, reductions in the rates on structural monetary tools, and a lower housing‐provident‐fund loan rate:

1. Lower policy rates by 0.1 percentage points—reducing the seven-day reverse-repo rate from 1.5 percent to 1.4 percent—which is expected to pull the Loan Prime Rate (LPR) down by about 0.1 percentage points.

2. Slash rates on structural tools by 0.25 percentage points, including re-lending for agriculture and small businesses (from 1.75 percent to 1.5 percent) and the pledged supplementary lending (PSL) rate (from 2.25 percent to 2 percent).

3. Cut the personal housing‐provident‐fund loan rate by 0.25 percentage points: the rate on first‐home loans of over five years will fall from 2.85 percent to 2.6 percent, with other tenors adjusted accordingly.

3. Structural policies, designed to enhance existing tools and introduce new facilities to support technological innovation, expand consumption, and advance inclusive finance:

1. Increase the re-lending quota for technological innovation and equipment upgrading by ¥300 billion—to a total of ¥800 billion—to sustain large-scale machinery renewal and trade-in programs.

2. Establish a ¥500 billion re-lending line for service consumption and elderly‐care, guiding commercial banks to expand credit to those sectors.

3. Boost the “smart agriculture” re-lending quota by ¥300 billion and lower its rate, creating synergy with the rate cuts to help banks lend more to small agricultural and private enterprises.

4. Optimize two capital‐market support tools—the ¥500 billion securities-fund/insurance swap facility and the ¥300 billion stock-pledge‐repo re-lending—by merging them into a single ¥800 billion tool.

5. Introduce a risk-sharing instrument for science-and-technology innovation bonds: the PBOC will provide low‐cost re-lending funds for purchasing these bonds and, in collaboration with local governments and market credit agencies, use joint guarantees and other credit enhancements to share potential default losses, thereby supporting the issuance of low‐cost, long-term innovation bonds by tech enterprises and equity investors.

These ten principal measures, grouped into the three categories above, will be published on the People’s Bank of China website and rolled out in due course.