© Reuters. FILE PHOTO: A man wearing a mask walks past the headquarters of the People’s Bank of China, the central bank, in Beijing
SHANGHAI (Reuters) – China’s central bank on Wednesday stepped up political support for its struggling economy, lowering a key rate to record levels and reducing the amount banks need to hold in reserves by around $ 28 billion as the coronavirus crisis has slowed growth.
Together, these measures inject a total of $ 43 billion into the financial system before a report released on Friday that should show that GDP fell 6.5% in the first quarter, the first quarterly contraction of the world’s second largest economy. in over 30 years.
The People’s Bank of China (PBOC) said it is cutting medium-term one-year loans (MLFs) to financial institutions
This drop should pave the way for a reduction similar to the country’s prime lending rate (LPR), which will be announced on the 20th, in order to reduce the financing costs of businesses affected by the pandemic.
In a statement, the central bank said it was injecting 100 billion yuan ($ 14.19 billion) through the liquidity tool.
The drop 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 drop in the 7-day reverse repo rate in late March.
“In general, the one-year MLF is still close to 3%, the highest of all major economies, which provides PBOC space for further easing if things get worse,” Yun Xiong, portfolio manager at Green Harmony Capital in Hong Kong.
Some market participants believe that the double easing of the PBOC on Wednesday – lowering the cost of borrowing in the medium term on the same day when the first phase of a reduction in the reserve requirement ratio (RRR) takes effect – is a sign that authorities are stepping up their monetary support as the markets prepare for grim economic data.
China is expected to release GDP and activity indicators for the first quarter on Friday. In addition to the contraction in the first quarter, analysts predict that growth in 2020 will slow sharply to 2.5%, the weakest in nearly half a century, from 6.1% last year.
“Unlike previous easing cycles, when most of the new credit was used to finance spending on infrastructure, real estate and consumer durables, this time we expect most of the new credit to be used for financial relief to help businesses, banks and households survive the COVID -19 crisis, “Nomura analysts said in a note.
The Chinese central bank said earlier this month that it is reducing the amount of cash that small banks must hold as reserves to support the economy, which has been hit hard by the coronavirus crisis.
The first phase of the decline took effect on Wednesday, releasing about 200 billion yuan (28.37 billion US dollars) in long-term funds, the PBOC said in its statement, but did not comment on the drop in MLF rates.
MORE EASE EXPECTED
“As external headwinds increase and domestic demand is struggling to fully recover from the COVID-19 epidemic even as most companies have resumed operations, the PBOC appears to be accelerating the pace of monetary easing” , Julian Evans-Pritchard, senior Chinese economist at Capital Economics said in a note.
“But it will take even more for the economy to get back on track,” he said, and plans another 100 basis points for further rate cuts this year.
A lower MLF rate should encourage commercial banks to lower the loan benchmark, as the cost of medium-term loans is now used as a guide for the LPR.
“We expect a drop in LPR, but the magnitude does not necessarily correspond to these 20 basis point reductions,” said Frances Cheung, Asia macro manager at Westpac in Singapore, predicting a drop of 5 10 basis points from the LPR.
Global central banks have put in place unprecedented stimulus packages in recent weeks, drastically cutting rates and injecting billions of dollars to support their economies, with many countries having been placed under tight restrictions to contain the pandemic.
However, some analysts have questioned whether monetary easing could reach its limits and doubts that it can provide sufficient boost to the demand needed to revive the economy.
“The problem is not the level of interest rates at the current time,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis in Hong Kong.
“They have to encourage (people) to consume,” she said, arguing for the expansion of a local voucher program already started in the city of Hangzhou.
“They are really under pressure to stop cutting because insurance companies and banks are really worried about their margins,” she said.
No MLF loan is scheduled to expire on that day, although a 200 billion yuan batch of these loans will mature on Friday. Markets are generally ready for PBOC to take action when existing loans expire.