China is embarking on a more aggressive policy response to re-energize the economy with the launch of a new multi-billion dollar fund, a rate cut and other policy measures.
The State Council approved last week the creation of a 300 billion yuan ($48.4 billion) insurance investment fund that will finance the construction of infrastructure projects such as transport facilities and irrigation works, renovate shantytowns, and the so-called “Belt and Road Initiative.”
The funds will be raised from the country’s insurance sector, and can be invested directly or through a fund of funds, a statement on the State Council’s website said.
Alongside this spending push, the central bank – the PBOC – announced another 25 bps rate cut over the weekend, its fourth since November 2014, and another reduction in the banks’ reserve requirement. It follows the scrapping of the 75% loan-to-deposit ratio ceiling last week.
These measures come just when the country’s equities market is plunging, sending quivers on the spines of investors, particularly the country’s retail investors who mostly borrowed money to fund their stock purchases. Last Friday, the Shanghai Composite Index tumbled more than 7%, following a 13% decline the week before that (June 15-19), its worst weekly performance since the global financial crisis in 2008.
Commenting on the timing of the rate cut, Bank of America Merrill Lynch wrote in a note released Monday morning:
“Coming right after the 7.4% fall in SHCOMP on Friday, it suggests that the government sees the urgent need to stabilize market sentiment and to reduce risks of a stampede in the stock market which could in turn harm economic and financial system stability. It sends a clear signal of continued monetary easing, dismissing market concerns of a possible change in PBoC stance. It helps to lower risk free rates and financing costs, supports liquidity and credit supply, and lowers debt service burden for borrowers. Thus it is positive for the real economy and helps contain financial risks.”
China is facing its lowest growth rate of 7% in more than two decades this year, a scenario that has been part of the government’s plan to shift from export-driven to the more stable domestic consumption and investment-led growth.
The “Belt and Road Initiative” refers to a program that will build infrastructure projects such as roads, bridges and railways that will connect China with the rest of the world. It complements the Chinese government’s recent efforts to put up the Asian Infrastructure Investment Bank.
Here’s what BlackRock has to say about the “Belt and Road” program:
“Potential long-term benefits for China include lowering trade costs through better roads, railways, ports and airports, developing new export markets, putting the domestic infrastructure industry’s excess capacity to work, and promoting internationalization of the yuan.”
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