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China Ramps Up Campaign to Boost Fragile Economy, Currency

(Bloomberg) — China intensified efforts to stimulate the economy and support its currency, as investor concerns over the growth outlook persist.

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The central bank will trim the amount of foreign currency deposits banks are required to hold as reserves for the first time this year, the People’s Bank of China said Friday. The move came hours after authorities announced fresh stimulus for the beleaguered property sector and unveiled plans to expand tax breaks for child and parental care and education.

The steps are the latest efforts to shore up confidence in the world’s second-largest economy, which is sagging under the weight of the persistent housing crisis, waning global demand and rising unemployment. Authorities have so far resorted to a drip-feed of targeted measures, avoiding the big-bang stimulus approach they deployed during the 2008 global financial crisis amid concerns over elevated debt levels.

“The policy package exceeds market expectations,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. “Confidence will be boosted in the near term. We still need more evidence to confirm if it marks a turnaround.”

Financial institutions will need to carry just 4% of their foreign exchange deposits in reserve starting Sept. 15, the PBOC said, compared with the current level of 6%. The move effectively boosts the amount of foreign currency available in the local market, making it relatively more appealing for traders to buy the yuan.

As the number of stimulus measures mounts, China’s markets are starting to show signs of stabilization. Traders took these latest steps as a mild positive, with the yuan, stocks and various commodities posting modest gains.

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The offshore yuan rose as much as 0.5% against the dollar before paring the move to trade 0.1% stronger, on course for a second straight weekly advance. A gauge tracking Chinese property developers added 1.2% and the broader CSI 300 Index climbed 0.7%, also helped by figures showing an unexpected expansion in manufacturing activity.

Metals including aluminum and copper rallied as support for China’s economy may underpin demand for raw materials. Hong Kong’s stock market was closed due to a typhoon.

With the property measures and the so-called FX RRR cut both being announced before the market open, “there could be some element of that timing being used to help sustain China assets, especially with the PMIs giving some positive signals,” said Eddie Cheung, senior emerging market strategist at Credit Agricole CIB in Hong Kong. “But so far, the reaction has still been pretty contained.”

China’s currency slid toward its weakest level since 2007 against the dollar in August, after a surprise interest-rate cut failed to boost investor sentiment damaged by ongoing economic weakness. It has fallen around 5% this year amid the nation’s widening rate divergence with the US, and is among Asia’s worst performers next to the yen and the Malaysian ringgit.

The PBOC has ramped up support for the currency via tools such as setting a stronger-than-expected daily reference rate, prompting state banks to sell dollars and tightening offshore yuan liquidity to squeeze shorts.

“As the yuan is the anchor of all the asset classes, authorities are trying to stabilize the broader financial markets through the measure,” said Hao Hong, chief economist of Grow Investment Group.

Recent economic data has shown signs of improvement. The Caixin manufacturing purchasing managers index rose to 51 in August, the highest reading since February, figures showed Friday. The numbers came a day after the official manufacturing PMI showed the contraction in activity easing as new orders and production improved.

To boost demand in the property sector, authorities moved to allow the largest cities to cut down payments for homebuyers and encouraged lenders to lower rates on existing mortgages. That may help homeowners save at least tens of billions of yuan in annual interest payments and spur household spending, according to state media reports.

Read more: Here’s Everything China Is Doing to Save Its Property Market

Beijing and Shanghai lowered mortgage requirements Friday for some homebuyers following guidance from the central government. Both megacities will no longer disqualify people who’ve previously had a mortgage from being considered first-time homebuyers as long as they don’t own property. The moves come a day after Beijing announced that nationwide minimum down payments will be set at 20% for first-time buyers and 30% for second-time purchasers.

“These measures may provide a brief respite to housing markets, especially in large cities,” Nomura Holdings Inc. economists including Ting Lu wrote in a note. They see a potential boost to consumption, estimating that mortgage borrowers can save as much as 300 billion yuan a year from cheaper loans.

What Bloomberg Economics Says:

The latest measures are “well designed to stimulate consumption while avoiding inflating more property bubbles.” Stimulus is expected add about 1 percentage point to economic growth this year and 1.1 percentage points in 2024.

—Chang Shu, chief Asia economist. Read the report here

China is also proposing to lift home-purchasing curbs in non-core districts of major cities such as Beijing, Shanghai and Shenzhen, Reuters reported. Such restrictions, including on the number of properties people can buy, have been in place in many cities since 2010, it said.

Ending the two-year housing slump is key to reviving growth because the sector and related industries make up about a fifth of the economy. Underscoring the challenge, sales by the country’s largest developers fell 34% in August from a year earlier, a report showed Thursday, and Country Garden Holdings Co. — the former No. 1 — is on the brink of default.

Read about Country Garden’s postponement of bondholder vote

On the tax front, China unveiled steps on Thursday to increase personal income tax deductions for child care, parental care and children’s education spending. They are the latest steps to address the country’s rapidly changing demographics and boost household consumption.

“Policy momentum is clearly picking up,” Citigroup Inc. analysts including Xiangrong Yu wrote in a note. “This macro backdrop could be more supportive for China assets.”

–With assistance from Emma Dong, Lucille Liu and Charlotte Yang.

(Updates with down payment changes in Beijing)

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