China cuts rates, injects liquidity amid coronavirus epidemic as markets sink

The People's Bank of China said on it was lowering the seven-day reverse repo rate to 2.40 per cent from 2.50 per cent.
The People's Bank of China said on it was lowering the seven-day reverse repo rate to 2.40 per cent from 2.50 per cent.PHOTO: REUTERS

SHANGHAI (REUTERS, BLOOMBERG) - China’s central bank unexpectedly lowered the interest rates on reverse repurchase agreements by 10 basis points on Monday (Jan 3), as authorities stepped up measures to relieve pressure on the economy from a rapidly spreading virus outbreak.

The People’s Bank of China (PBOC) said on its website that it was lowering the seven-day reverse repo rate to 2.40 per cent from 2.50 per cent, and cutting the 14-day tenor to 2.55 per cent from 2.65 per cent previously.

On Monday, the PBOC also injected a total of 1.2 trillion yuan (US$236 billion) into money markets through reverse bond repurchase agreements. Markets had widely expected the liquidity move but most analysts thought rate cuts might follow later once the economic impact was more clear. 

China’s economy is facing increasing negative impact from the virus outbreak, especially on consumption, a vice chairman of the country’s state planner said on Monday.

Lian Weiliang of China’s National Development and Reform Commission said during a press briefing the impact from the outbreak will be for the short term and that China is fully capable of minimising the economic impact from the outbreak.

The repo rate cut came as Chinese financial markets reopened after an extended Lunar New Year holiday. The Chinese government is grappling with a deadly virus outbreak that has taken at least 361 lives in the country, infected more than 17,000 and forced a shutdown of many of its major cities. Authorities have pledged to provide abundant liquidity and urged investors to evaluate the impact of the coronavirus objectively.

Under the “reverse repo” scheme, PBOC will purchase a range of securities from investors seeking ready cash, to avoid a wave of forced selling as investors return to work from the extended Lunar New Year break, which was extended after the coronavirus outbreak.

According to Reuters’ data, just over 1 trillion yuan of existing reverse repo contracts expire on Monday – the PBOC move will allow these to be rolled over, plus an extra 150 billion yuan (S$29.6 billion) of fresh support.

This marks the largest single-day reverse repo operation China’s central bank has ever conducted.

The injection is one of 30 measures announced by Chinese authorities over the weekend to buttress the economy against disruption from the outbreak, which originated from the central Chinese city of Wuhan.

China’s finance ministry will give subsidies on interest payments for some firms hit by the spreading coronavirus outbreak, state-run newspaper Guangming Daily reported on Monday. The subsidies will be based on 50 per cent of the interest rate on loans make by the central bank to support firms hit by the epidemic, for a period no longer than a year, the newspaper said.

 
 
 

On Monday also, the Shanghai Futures Exchange (ShFE) said will suspend its night-time trading sessions until further notice, citing the need to prevent and control a virus outbreak in China.

A number of Chinese provinces and cities have also extended the Lunar New Year break until the end of Feb 9, including Shanghai and Guangdong. Beijing, the country’s administrative center, stopped short of declaring this week a holiday. Instead employees are encouraged to work from home.

The outbreak meanwhile is leaving China increasingly isolated. The US, India, Australia, Indonesia, Singapore, Israel, Russia, New Zealand and the Philippines have all imposed restrictions on visitors from China. In Hong Kong, the government said it was studying further controls on travel from the mainland in response to a planned strike by medical workers aimed at pressuring the government to shut the border with China.

Economists at Citigroup said the steps taken by Chinese authorities were “unlikely to be sufficient to curtail a sharp downturn in Q1.”

“As most employees won’t return to work until Feb 9, the output losses are likely to be larger than expected, and incoming economic activity data will continue to prompt the authorities to take more actions in order to reduce the adverse impact of the Wuhan coronavirus on the economy,” they noted.

 
 

Citi revised its full-year forecast for China’s GDP growth to 5.5 per cent in 2020 from 5.8 per cent. It also cut first-quarter growth expectations to 4.8 per cent, compared with 6 per cent in the fourth quarter of 2019.

JPMorgan shaved its forecast for global growth by 0.3 percentage points for this quarter.