China has been making major changes in its economic policies to boost growth, and now the world’s second-largest economy faces a bigger fiscal challenge.
The People’s Bank of China on Wednesday cut its benchmark rate for lending to banks by a quarter of a percentage point, the first major cut in almost three years.
The central bank said it will increase the amount of government debt it lends to banks from 5% of gross domestic product to 10%.
It also said it is lowering the interest rate on government bonds by a further 0.1 percentage point in the first quarter.
China’s economy shrank 0.2% in the quarter.
Its growth was the worst in five years, a sharp drop from the 2.6% growth in the third quarter.
China’s growth was expected to bounce back in the second half of next year as it expands its industrial base, but the central bank’s action is likely to cause a delay.
China has been cutting spending and borrowing as its economy faltered.
The government is trying to boost economic growth by cutting subsidies for businesses, easing controls on banks and easing state controls on internet shopping.
On Wednesday, the PBOC also said its goal of boosting domestic demand through monetary stimulus would not be met until China was “clear of the fiscal cliff.”
The central banker said the plan to boost domestic demand was not set in stone and would not require the central government to take further measures to boost the economy.
The PBOC is expected to release a plan on Thursday, but analysts said the government could delay it in order to give itself time to balance its budget.
While the central banker’s plan has been met with widespread criticism, it has also been praised by some in Beijing, who see it as a necessary step toward stabilizing the economy after nearly three years of contraction.
China plans to release its long-awaited budget in the middle of next week, and analysts said they expected the government to announce the details of its plan.
But China’s state media, meanwhile, has been reporting that the central plan is set to include “big-ticket items” that will boost the government’s fiscal position.
In a commentary posted to the official People’s Daily on Wednesday, Zhang Zuoqiang, the vice governor of the central economic commission, said the PBEC would increase the number of government bonds that it holds from 3.5% to 4% of GDP by the end of the year, and would increase its debt-to-GDP ratio from about 70% to 80%.
Zuoqheim said the central banking commission is set “to do the right thing and put the fiscal adjustment plans into practice.”
The central government has said the cuts will increase China’s economic growth in coming quarters.
Despite the slowdown in economic growth, the People’s Development Bank (PDB) has increased its official reserves by 1.2 trillion yuan ($26.3 billion) since the start of 2017, or nearly a quarter in 10 months.
The bank said on Wednesday that it has taken on more debt, raising its long term borrowing ratio to nearly 120% of the GDP.
A more immediate worry for the PBBC is the possibility of an economic slowdown in the fourth quarter.
In its most recent economic update, the central banks said it expects growth to slow to around 1.8% in 2018 and then slowly recover to around 2.5%.