China is about to inject nearly $142.4 billion (1 trillion yuan) to boost the capacity of its biggest state bank to support its struggling economy and sluggish markets, sources said. Beijing plans to issue new sovereign bonds to finance the Chinese government’s biggest bailout since the 2008 global financial crisis, sources said.

The move is in line with Beijing’s wide-ranging stimulus measures to boost its flagging economy after four of its five biggest lenders reported losses in the second quarter, Bloomberg reported. Banks had cut interest rates in response to government requests to spur a drop in loan applications. Analysts have recommended more fiscal stimulus as China’s growth target was at risk from deflationary pressures.

Beijing unveils massive stimulus package to restore economic confidence

Exclusive: China is considering injecting up to $142 billion in capital into its largest state banks, the first since the 2008 global financial crisis https://t.co/hCnbhSu8J2

— Bloomberg (@Business) September 26, 2024

China has been considering whether to fund its biggest banks with a massive $142 billion capital injection into its sagging economy. But the decision is not final; it is still in the early stages. China’s central bank unveiled its planned economic stimulus package on Sept. 24 in an attempt to pull the economy out of deflationary pressures and restore confidence in the world’s second-largest economy.

The People’s Bank of China (PBOC) has come under fire from analysts who questioned the effectiveness of its liquidity injections given that consumers and businesses have very low demand for credit. Analysts also pointed to the lack of policies to support real economic activity to revive and sustain China’s protracted structural slowdown. They also noted that more fiscal stimulus will be needed to bring this year’s growth trajectory to its 5% target.

“This is the most significant stimulus package from the PBOC since the early days of the pandemic... but by itself it may not be enough.”

– Julian Evans-Pritchard, Capital Economics Analyst

The People’s Bank of China also said it would cut interest rates, including the new benchmark seven-day reverse repo rate, which it plans to cut by 0.2 percentage points to 1.5%. It also said the interest rates on the medium-term lending facility would be cut by 30 basis points and the key interest rates by 20-25 basis points. Gary Ng, chief economist at Natixis, said that while such policy changes may come a little late, they are better than nothing.

China's benchmark CSI 300 index rose 0.35%, Hong Kong's HSI traded 1.5% higher, and the yuan rose 0.12% as of Sept. 26.

Lowering interest rates hurts China's economy

Four of China’s top five banks reported lower revenues in the second quarter after a “push” from the Chinese government to boost credit demand by cutting lending rates. Industrial and Commercial Bank of China Ltd. (ICBC) and China Construction Bank (CCB) reported a 0.8% and 1.4% decline in their second-quarter net profits, respectively.

Industrial and Commercial Bank of China's (NIM) net interest margin narrowed to 1.43% by the end of June, down from 1.48% just three months earlier.

Bank of Communications (BoCom) and Bank of China also reported lower profits in the second quarter, although AgBank bucked the trend by increasing its profits by 14.2%.