China cuts medium-term borrowing costs to record low

SHANGHAI • China's central bank 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 around US$28 billion (S$40 billion) as the coronavirus crisis slammed the brakes on growth.

When combined, the moves inject US$43 billion into the financial system ahead of a report tomorrow that is expected to show gross domestic product (GDP) fell 6.5 per cent in the first quarter, the first quarterly contraction in the world's second-biggest economy in more than 30 years.

The People's Bank of China (PBOC) said it was lowering the one-year medium-term lending facility (MLF) loans to financial institutions to 2.95 per cent, the lowest since the liquidity tool was introduced in September 2014, down 20 basis points from 3.15 per cent previously.

The cut should pave the way for a similar reduction to the country's benchmark loan prime rate, which will be announced next Monday, to lower financing costs for companies hit by the pandemic.

In a statement, the central bank said it was injecting 100 billion yuan (S$20 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 per cent, the highest among all major economies, which offers the PBOC space for further easing if things get worse," said portfolio manager Yun Xiong of Green Harmony Capital in Hong Kong.

Some market participants believe the PBOC's dual easing move yesterday - lowering the medium-term borrowing cost on the same day that 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 themselves 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 this year's growth to slow sharply to 2.5 per cent, the weakest in nearly half a century, from 6.1 per cent 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 analysts said in a note.

China's central bank said earlier in the month that it was cutting the amount of cash that small banks must hold as reserves to shore up the economy, which has been badly jolted by the coronavirus crisis.

The first phase of the cut came into effect yesterday, freeing up around 200 billion yuan of long-term funds, the PBOC said in its statement, although it did not comment on the MLF rate cut.

REUTERS