China shifts to stimulus mode to help boost its faltering economy

China's central bank on Tuesday unexpectedly cut its key short-term interest rate

China is ramping up policy stimulus to help boost its faltering economy, although soaring debt levels and concerns about financial stability mean the measures are likely to be limited compared with support packages in previous downturns. The People’s Bank of China unexpectedly cut its key short-term interest rate on Tuesday, paving the way for lower bank lending rates and fuelling speculation of more easing. Officials are also considering a broad package of stimulus proposals, which include support for areas such as real estate and domestic demand, according to sources.  

The moves suggest a shift in stance from Beijing from its cautious approach to stimulus, underscoring policymakers’ concerns about the economy’s slowdown after a consumer-led surge early in the year started to peter out. 

However, the impact of the stimulus could be limited by the difficulties local governments and real estate companies are having servicing their large debt burdens.

“The room for traditional stimulus tools is increasingly small, and they have led to lingering negative impact in the past, including high local government debt, inefficient investment and resources being wasted,” said Lu Ting, chief China economist at Nomura Holdings. China’s high debt ratio means “it will be more difficult to roll out a support policy package,” he said. 

Lower costs for firmsChina’s top economic planner on Tuesday released 22 measures on lowering costs for firms this year, including exempting and reducing value-added tax for some firms and lowering loan interest rates. China will also increase loans to small firms and guide financial institutions to increase their medium- and long-term loan issuance for the manufacturing sector, said a statement.