China cuts interest rates and takes further measures to support the weakening economy

China introduced a series of measures on Tuesday to counter the ongoing property market slump that is weighing on the world's second-largest economy.

The head of the Chinese central bank announced that banks' minimum reserves would be reduced. Interest rates on loans to commercial banks were also lowered, the down payment for certain property purchases was reduced and other measures to revive the ailing economy were announced.

Disruptions and job losses during the Covid-19 pandemic, as well as falling property prices, have left many Chinese unwilling or unable to spend money, despite government efforts to encourage home purchases, electric vehicles and other expensive purchases.

People's Bank of China Governor Pan Gongsheng told reporters in Beijing that the reserve requirement for banks would be cut by 0.5 percentage points “in the short term” and that the central bank would make further cuts, freeing up more money for lending.

The news sent stock prices higher, particularly among property developers. Hong Kong's Hang Seng index rose 4.1%, while the Shanghai Composite index rose 4.2%.

Regulators are also planning new measures to stabilize the stock market, Pan and other officials said. Stock prices in China peaked before the global financial crisis in 2008 and have largely stagnated since then.

Analysts say the latest coordinated approach to support the property sector could be more effective than previous piecemeal measures that have so far provided little relief. The Federal Reserve's half-percentage-point interest rate cut last week also eased pressure on the Chinese yuan and gave the PBoC more room to maneuver.

This is “a step in the right direction,” said Julian Evans-Pritchard of Capital Economics in a commentary. “But it is unlikely to be enough to turn around growth unless it is followed by stronger fiscal support,” he said.

Unlike in the United States, where inflation has been the main concern of politicians in recent years due to the booming economy, China is struggling with slowing growth and downward pressure on prices as a result of weak demand.

The real estate market has stumbled after authorities cracked down on excessive borrowing by developers a few years ago, leading to many developers defaulting on their payment obligations and failing to deliver the apartments that buyers had already paid for.

Housing construction is an important form of investment in China and also supports many other industries, such as construction, interior design and home appliances.

China's regulators have avoided the kind of massive government spending packages that Beijing has used in the past to spur economic growth, fearing a property bubble. But disruptions and job losses during the COVID-19 pandemic, as well as falling property prices, have left many Chinese unwilling or unable to spend, depriving the economy of other engines that drive business activity.

The economy grew 4.7% annual interest last quarter, after growing 5.3 percent in the first three months of the year. Recently, Chinese President Xi Jinping called on the government to do more to get growth back on track.

Although markets responded enthusiastically to the flood of policy measures, some economists remained skeptical.

“The package is encouraging but insufficient to provide a floor to the housing market and the wider economy. A significant drop in nominal growth is inevitable,” said Rory Green and Freya Beamish of TS Lombard in a commentary.

Pan, the central bank governor, said down payment requirements for buyers of second homes would be reduced from 25% to 15% and mortgage interest rates would be cut by about 0.5%.

This would help 50 million households and 150 million people and reduce household interest expenses by an average of about 150 billion yuan ($21 billion) a year, he said.

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AP researcher Yu Bing in Beijing contributed to this report.