The People’s Bank of China (PBOC) yesterday stepped up policy support for its embattled economy, cutting a key rate to a record low and reducing the amount banks must hold as reserves by about US$28 billion as the COVID-19 pandemic slammed the brakes on growth.
The combined moves would inject a total of US$43 billion into the financial system ahead of a report tomorrow that is expected to show GDP fell 6.5 percent in the first quarter, the first quarterly contraction in the world’s second-biggest economy in more than 30 years.
The Chinese central bank said it was lowering the one-year medium-term lending facility (MLF) loans to financial institutions to 2.95 percent, the lowest since the liquidity tool was introduced in September 2014, down 20 basis points from 3.15 percent.
Photo: EPA-EFE
The cut should pave the way for a similar reduction to the nation’s benchmark loan prime rate (LPR), which is to be announced on Monday, to lower financing costs for companies hit by the pandemic.
In a statement, the PBOC said that it was injecting 100 billion yuan (US$14.15 billion) through the liquidity tool.
The cut was largely in line with market expectations, as economists believe the central bank would flatten the yield curve by lowering the MLF rate by the same margin as the cut to the seven-day reverse repo rate late last month.
“In general, the one-year MLF is still close to 3 percent, the highest among all major economies, which offers the PBOC space for further easing if things get worse,” said Yun Xiong (熊贇), portfolio manager at Green Harmony Capital Ltd (景和資本) in Hong Kong.
Some market participants believe the dual easing move — lowering the medium-term borrowing cost on the same day when the first phase of a targeted reserve requirement ratio cut comes into effect — is a sign the authorities are stepping up monetary support as markets brace for grim economic data.
China is due to release its first-quarter GDP data and activity indicators tomorrow. Besides the first-quarter contraction, analysts are forecasting that full-year growth would slow sharply to 2.5 percent, the weakest in nearly half a century, from 6.1 percent last year.
“Unlike previous easing cycles, when most of the new credit went to finance spending on infrastructure, property and consumer durable goods, this time we expect most of the new credit to be used on financial relief to help enterprises, banks and households survive the COVID-19 crisis,” Nomura Holdings Ltd analysts said in a note.
The PBOC said earlier in the month it was cutting the amount of cash that small banks must hold as reserves to shore up the economy.
The first phase of the cut came into effect yesterday, freeing up about 200 billion yuan of long-term funds, the PBOC said in its statement, although it did not comment on the MLF rate cut.
A lower MLF rate should incentivize commercial banks to reduce the lending benchmark, as the medium-term lending cost now serves as a guide for the LPR.
“We expect an LPR cut, but the magnitude does not necessarily match these 20-basis-point cuts,” said Frances Cheung (張淑嫻), head of macro strategy in Asia at Westpac Banking Corp in Singapore, predicting a cut of 5 to 10 basis points to the LPR.
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