Central Bank of China Pumps 300 Billion Yuan Into Financial System, Cuts Loan Rates

Central Bank of China Pumps 300 Billion Yuan Into Financial System, Cuts Loan Rates

The Chinese government has taken multiple steps so far to contain the economic fallout from the coronavirus epidemic, including interest rate cuts and financial injections worth billions of yuan. It did it again this week, extending the monetary easing provided by the central bank. With the budget under pressure, however, there are indications that Beijing may opt for some austerity measures later this year rather than a larger fiscal stimulus.

Also read: China Is Scrubbing Cash Notes to Stop Virus Spreading so Its Government Paper Money Won’t Kill You PBOC Cuts Interest Rates on Loans for Lenders

The People’s Bank of China (PBOC) injected 200 billion yuan (almost $29 billion) into the country’s banking system which has been experiencing liquidity issues over the past year. On Monday, the funds were offered as one-year medium-term loans for Chinese financial institutions, according to Reuters. The central bank also cut the interest rate on the money from 3.25% to 3.15%.

Furthermore, the PBOC added another 100 billion yuan ($14 billion) through seven-day reverse repurchase agreements, Bloomberg reported. 1 trillion yuan (over $143 billion) of reverse repos were due to expire on the first day of the week but in the end the measures resulted in a net 700 billion yuan (over $100 billion) withdrawal from the markets.

This week’s interest rate reduction was largely expected by observers. A similar cut in the benchmark loan prime rate, which serves to determine the price of corporate and household loans, is likely to follow later this month. Economists surveyed by Bloomberg expect the same 10-basis point decrease of the rate on 1-year loans.

These measures come in the wake of early February’s PBOC announcement that it’s going to spend 1.2 trillion yuan (over $170 billion) to support growth in the Chinese economy hit hard by the coronavirus epidemic. The outbreak has already claimed the lives of more than 1,700 people in mainland China. The funds were dedicated to the reverse repurchase operation aiming to maintain stability in the currency market.

Experts quoted in the report have expressed similar opinions about the latest intervention. According to Zhou Guannan, an analyst at Huachuang Securities Co., the rate cut was expected and the supplied funding is relatively small. Becky Liu, head of China macro strategy at Standard Chartered Plc, thinks the PBOC does not intend to lower front-end rates any further. Stimulus Through Fiscal Spending Only Not Feasible

Beijing has so far refrained from announcing a significant increase in its stimulus measures. Quoted by Reuters, the chief economist at Founder Securities, Yan Se, predicted that the PBOC will shift its focus from short term stabilization through large fund injections via reverse repo operations, to addressing the mid to long-term financing needs of Chinese businesses.

Additional fiscal spending and measures to encourage consumption remain on the table after China vowed to meet its 2020 targets for the economy last week, according to South China Morning Post. Local governments have been reportedly allowed to issue more debt to support growth in the short run. Corporate tax cuts should ease the burden on companies.

All this requires funding and the Chinese Minister of Finance, Liu Kun, believes efforts to reduce “unnecessary” government expenses must be made to fill in the widening budget gap. He discussed government plans in an article published recently in Qiushi, a magazine linked to the Communist Party of China. The minister pointed out that various external developments have intensified the downward pressure on the Chinese economy. At the same time, internal challenges such as the virus outbreak have created the need to increase fiscal revenue to cover the higher expenditures.

In 2019, China introduced the largest tax and fee reduction measures in its history, the government official remarked, amounting to over 2 trillion yuan, or more than 2% of GDP. These cuts will promote economic growth but also directly reduce fiscal revenue. Liu Kun also expects continuing pressure to increase spending, forcing the government to keep fiscal operations in a tight balance. “Under such circumstances, it is not feasible to implement a proactive fiscal policy solely by expanding the scale of fiscal expenditure,” the finance minister elaborated, indicating that Beijing is unlikely to commit to a large stimulus package as some investors have hoped.

What are your expectations about China’s fiscal and monetary policies in 2020? Share your thoughts in the comments section below.

Images courtesy of Shutterstock.

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