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China cuts medium-term rate to soften coronavirus hit to economy

Kitco News

SHANGHAI (Reuters) - China’s central bank cut the interest rate on its medium-term lending on Monday as policymakers sought to ease the drag to the businesses from a coronavirus outbreak that has severely disrupted activity.

The move is expected to pave the way for a reduction in the country’s benchmark loan prime rate (LPR), which will be announced on Thursday, to lower borrowing costs and ease financial strains on companies hit by the virus epidemic.

The People’s Bank of China (PBOC) said it was lowering the rate on 200 billion yuan ($28.65 billion) worth of one-year medium-term lending facility (MLF) loans to financial institutions CNMLF1YRRP=PBOC by 10 basis points (bps) to 3.15% from 3.25% previously.

The cut helped Chinese stock markets rally, which in turn lent support to other Asian bourses.

The central bank attributed the move to keep banking system liquidity “reasonably ample” to counter factors including maturing reverse repos, but it did not address the specific reason for the rate move.

No MLF loans were due to mature on Monday.

Earlier this month, the PBOC unexpectedly lowered the interest rates on reverse repurchase agreements by 10 basis points as the virus outbreak escalated.

Traders and analysts said cutting the MLF rate following a similar move in the reverse repo rate would help the reduction in rates to feed through to longer-term lending.

FRESH HEADACHES

The coronavirus outbreak has hit the Chinese economy just as it was starting to show some signs of stabilizing after 2019 growth cooled to its slowest pace in nearly 30 years.

The virus has already killed more than 1,700 people and infected more than 70,000 and is yet to show convincing signs of peaking with more than 2,048 new cases reported on Monday.

Some analysts believe China’s economy could contract in the first quarter on a sequential basis due to the shock to business and tough public health restrictions.

With transport curbs still in place in many parts of the country, economic activity in China remains subdued, although there are reports more factories are slowly resuming production.

“An imminent V-shaped recovery is looking less likely than a few days ago,” Capital Economics said in a note on Friday.

When compared with a year earlier, first-quarter growth could slump to 4.5% from 6.0% in the fourth quarter, according to the latest Reuters poll.

To be sure, most analysts expect a sharp rebound in the second quarter if the disease can be contained soon, but they warn disruptions could continue to ripple through manufacturing and service sectors for months to come.

“The central bank will shift its focus to support firms’ mid- to long-term financing needs rather than short-term stabilization,” Yan Se, chief economist at Founder Securities in Beijing said, noting the PBOC’s large fund injections via reverse repo operations in the last two weeks.

He now expects a targeted reduction to bank’s reserve requirement ratio (RRR) at the end of month.

Further cuts in China’s key lending rates are widely expected in coming months to ensure a recovery takes hold. More fiscal spending is also believed to be on the cards, along with measures to boost domestic consumption.

The MLF, one of the PBOC’s main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR, which is set monthly using assessments from 18 banks.

The PBOC also said in the statement that it injected 100 billion yuan of reverse repos to financial institutions on Monday, when a total of one trillion yuan worth of reverse repos are due to expire.

Reporting by Winni Zhou and Se Young Lee; Editing by Kim Coghill and Sam Holmes

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