Coronavirus: why is China keeping its powder dry on interest rates as economic contagion grows?

The People’s Bank of China has refused to join other major central banks in cutting its benchmark lending rate to staunch the economic shock of the coronavirus pandemic

Beijing has taken a more cautious approach, instead pumping money into the banking system to boost lending by cutting the required reserve ratio

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China’s central bank has been pumping vast sums of money into the banking system in an effort to get banks to expand lend to factories and workshops. Photo: Reuters

Published: 8:13pm, 20 Mar 2020Updated: 11:01pm, 20 Mar 2020

China’s central bank kept its main policy interest rate unchanged on Friday, dashing expectations that it would join widespread interest rate cuts in other countries and sending a clear sign that Beijing is taking a more conservative approach in aiding its coronavirus-battered economy than other major nations.

Beijing’s refusal to lower the loan prime rate (LPR) – the new benchmark for the country’s lending rates that it rolled out late last year – comes as major central banks are rushing to slash interest rates and boost asset purchases to cushion the economic shock from the global Covid-19 pandemic that has killed nearly 10,000 people worldwide.

Central banks in the United States, Canada, Britain, Australia, South Korea, Taiwan and Brazil have all cut rates in March, while the European Central Bank and Bank of Japan have expanded their quantitative easing as their interest rates were already in negative territory.

The People’s Bank of China (PBOC), on the other hand, is following a different policy trajectory in supporting the country’s economy, which is on track to suffer its first contraction this quarter since 1976.

Instead of cutting rates, China’s central bank has been pumping vast sums of money into the banking system in an effort to get banks to expand their lending to the country’s factories and workshops.

Last Friday, the PBOC announced a selective cut in required reserve ratio, or the percentage of deposits a bank must hold in reserve at the central bank, to unleash 550 billion yuan (US$77 billion) for banks to lend, adding to the 800 billion yuan added to the market in February.

Ma Jun, a member of the PBOC’s monetary policy committee, an advisory body, said China would continue to cut the required reserve ratio as its main policy tool to pump credit into the banking system.