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China lowered the rate at which it lends to banks to support the economy deal with the fallout from the coronavirus. Photo: Reuters

Coronavirus: China slashes bank loan rate by biggest amount in five years, joining global easing

  • People’s Bank of China reduces 7-day reverse repo rate to 2.20 per cent from 2.40 per cent, the largest cut since 2015
  • Move comes as analysts expect China’s economy to contract in the first quarter for the first time since 1976

China’s central bank on Monday cut the interest rate it charges on loans to banks by the biggest amount since 2015 as authorities ramp up their response to the worsening economic impact from the coronavirus pandemic.

The People’s Bank of China (PBOC) reduced the interest rate on 7-day reverse repurchase agreements to 2.2 per cent from 2.4 per cent, according to a statement from the bank on Monday. The PBOC said this wwould keep liquidity sufficient to help the real economy.

The first cut to a PBOC policy rate since February is in line with a pledge by the Communist Party’s leadership on Friday to increase support to the economy through increased sales of sovereign debt, as domestic and international demand slumps due to the pandemic. The step brings the PBOC closer in line with the stance of global peers, who have loosened policy dramatically in recent weeks.

“The larger-than-usual rate cut is an expression that China is willing to join the coordinated consortium for economic stabilisation,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong. “Small and medium-sized businesses are collapsing for lack of cash flow.”

The larger-than-usual rate cut is an expression that China is willing to join the coordinated consortium for economic stabilisation
Raymond Yeung

A reduction in the central bank’s main tool to adjust the price of market liquidity also signals coming reductions in its main one-year funding tool, and potentially a corresponding cut to the benchmark deposit rate. Cuts to policy rates should also be reflected in the main market benchmark of the cost of lending to companies, the loan prime rate.

“Lowering banks’ lending rates without a reduction in the cost of their liabilities will squeeze banks’ net interest margin, eroding their profitability and capital base,” said Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Bank. “A benchmark deposit rate cut is necessary.”

China will increase its fiscal deficit as a share of gross domestic product, issue special sovereign debt and allow local governments to sell more infrastructure bonds as part of a package to stabilise the economy, according to a Politburo meeting on Wednesday, Xinhua reported late on Friday.

In a separate statement published the same day, the People’s Bank of China called for better coordination of global macro policies, while re-emphasising it will keep liquidity sufficient to help with the real economy and watch out for inflation risks.

The cut on Monday indicates the PBOC has entered “a stage with stronger countercyclical adjustment,” out of consideration of both domestic demand and the global virus outbreak, Ma Jun, a PBOC adviser, said in a statement sent to the media after the rate cut. “The PBOC doesn’t use its bullets all at once. China still has plenty of room in monetary policy.”

Economists have lowered their median forecast for economic growth to 2.9 per cent for 2020, down from 6.1 per cent last year, in what would be the slowest pace since 1976, when the Cultural Revolution wrecked the economy and society. Until the past few days, China’s policymakers had maintained a relatively cautious programme of easing, mindful of the nation’s heavy debt load and of risks to financial stability.

While the Politburo statement and the PBOC move signal the response is moving up a gear, it still falls short of a no-holds-barred stimulus.

The leaders of the Group of 20 said last week they were injecting more than US$5 trillion into their economies to fight the effects of the outbreak. Central banks globally have slashed interest rates and started quantitative easing programmes.

“Certainly, the policy easing is continuous and today’s liquidity injection at least suggests that the policy aid will be mildly constant and will be more proactive when the authorities deem necessary,” said Zhou Hao, an economist at Commerzbank AG. “China is joining the global easing wave.”

China’s move came only a few hours after Singapore’s central bank took unprecedented easing steps on Monday to support a trade-reliant economy being slammed by the coronavirus outbreak.

The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool rather than a benchmark interest rate, lowered the midpoint of the currency band and reduced the slope to zero. That implies the central bank will allow for a weaker exchange rate to help support export-driven growth and to ward off deflationary threats.

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