China cuts key lending rate to prop up coronavirus-hit economy

The one-year loan prime rate was lowered by 10 basis points to 4.05 per cent from 4.15 per cent at the previous monthly fixing.
The one-year loan prime rate was lowered by 10 basis points to 4.05 per cent from 4.15 per cent at the previous monthly fixing.PHOTO: EPA-EFE

SHANGHAI (REUTERS) - China cut the benchmark lending rate on Thursday (Feb 20), as widely expected, as the authorities move to lower financing costs for businesses and support an economy jolted by a severe coronavirus outbreak.

The epidemic has disrupted global supply chains and caused widespread disruption to businesses and factory activity in China, prompting authorities to deliver a steady stream of policy measures over recent weeks to cushion the blow to growth.

The one-year loan prime rate (LPR) was lowered by 10 basis points to 4.05 per cent from 4.15 per cent at the previous monthly fixing.

The five-year LPR was lowered by 5 basis points to 4.75 per cent from 4.80 per cent.

All 51 respondents in a Reuters snap survey had expected a reduction in the LPR, with 38 respondents, or about 75 per cent of participants, tipping a 10 basis points cut to both tenors.

Mayank Mishra, macro strategist at Standard Chartered Bank in Singapore, said the cut to LPR was in line with expectations, but it may not be enough to overcome the economic impact of the virus.

“The Chinese authorities are sending a message that easing will happen, but it will happen at a measured pace. They do not want fuel expectations that they will be easing aggressively,” Mishra said.

“We expect more monetary easing in the form of 100 basis points in the required reserve ratio and 10 basis points in the medium-term lending facility in addition to what we’ve already seen.”

China’s yuan weakened to a more than two-month low against the US dollar after the LPR cut, mainly pressured by further easing expectations.

Jacqueline Rong, senior China economist at BNP Paribas in Beijing, said she had expected a deeper cut to one-year LPR especially as interbank market rates have already posted sharp declines in the past month.

Banks are already setting lending rates well below the benchmark and if government subsidies are taken into account, some borrowers may not pay any interest at all, sources told Reuters.

Some analysts say the minor cut to the 5-year LPR likely signalled that authorities wanted to avoid stoking a property bubble and causing more damage to the economy in the longer run.

The People’s Bank of China (PBOC) has pledged to use tools such as targeted reserve requirement cuts, relending and rediscount, to support key sectors affected by the outbreak, having already injected over US$200 billion in liquidity in a bid to help lower financing cost.

The world’s second-biggest economy, already grappling with growth at its weakest in almost three decades as a trade war with the United States took its tool, had shown some signs of stabilisation just before the epidemic hit.

When compared with a year earlier, first-quarter growth could slump to 4.5 per cent from 6.0 per cent in the fourth quarter, according to the latest Reuters poll. Some analysts warn of even lower growth closer to the 3 per cent mark, underlining the widespread business disruption caused by the virus.

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August 2019, loosely pegging it to the medium-term lending facility rate.

Julian Evans-Pritchard, senior China economist at Capital Economics, warned that policy easing steps will only be of modest help for small firms - a key part of the economy.

“While more easing is likely in the coming weeks, this alone won’t change the fortunes of the millions of small firms suffering from the coronavirus outbreak,” he said.

“Surveys suggest that one-third of these firms may run out of cash in the coming two weeks unless activity normalizes.”