In January, the PBOC cut the reserve requirement to 12.5 per cent from 13.0 per cent for big banks, and to 10.5 per cent from 11.0 per cent for small and medium-sized banks.

In addition, the PBOC provided 800 billion yuan (US$115 billion) in extra funds to commercial banks in February after the outbreak to further boost lending to farms and small businesses. China’s three government-controlled policy banks, whose lending supports Beijing’s key policy initiatives, were also asked to increase lending to the economy by 350 billion yuan (US$50 billion).

Progress in controlling the virus outbreak has allowed Beijing and its local governments to start dismantling some citywide lockdowns and travel restrictions that brought much of the world’s second largest economy to a standstill over the past month.

“This looks strange as China needs more credit to buffer the economy amid the [coronavirus] outbreak,” Iris Pang, Greater China economist at ING Bank said. “[But] the role of bank loans to alleviate the damage from the coronavirus may [only] be modest.”

Short-term business lending, typically favoured by smaller Chinese companies, contracted by 396 billion yuan in February, more than reversing the 140 billion yuan gain in January, reflecting the slow resumption of small business operations and their continued difficulties in accessing credit.

Government bond issuance rose by 943.7 billion yuan (US$136 billion) in February, well above the 339.1 billion yuan from the same period a year ago, suggesting that Beijing will, yet again, rely on large firms, particularity state-owned enterprises that are able to borrow directly from the market to help support growth, Pang added.

In addition, local authorities have been mulling fiscal measures to boost consumption including tax cuts, rent cuts and reductions in utility costs.

Hainan province pledged to hold a series of events to encourage local consumer spending as well as attract domestic and global tourists to the island following the coronavirus outbreak, while the local government in a district of Nanjing city also encouraged government agencies to take the lead in increasing spending to support the local catering and retail sectors, which have been hit particularly hard.

Jing Sima, China strategist at BCA Research, however warned there was a risk that the PBOC could underestimate the impact on small businesses if it did not ease monetary policy sufficiently.

China’s private sector firms are particularly vulnerable to cash flow restrictions because many businesses are already highly leveraged, Jing said.

“The nationwide city lockdowns are certain to reduce or halt the flow of cash to businesses, and it is unclear whether this will have any disproportionate effects on corporate earnings relative to what we expect will occur for the economy beyond the first quarter,” Jing said.