China unexpectedly cuts key rate, pumps $10b into coronavirus-hit money markets

SHANGHAI • China's central bank unexpectedly cut the rate on reverse repurchase agreements (repos) by 20 basis points yesterday, the largest in nearly five years, as the authorities ramped up steps to relieve pressure on an economy ravaged by the coronavirus pandemic.

The People's Bank of China (PBOC) announced on its website that it was lowering the seven-day reverse repo rate to 2.2 per cent from 2.4 per cent, but it did not give a reason for the move.

Central bank adviser Ma Jun told state media that China still has ample room for monetary policy adjustment and the rate decision took into consideration the return of Chinese firms to work, the global virus situation and a deterioration in the external economic environment.

It is the third cut in the seven-day rate since November, and comes as coronavirus infections in China - where the outbreak originated late last year - slowed from a peak last month. The country has so far reported over 3,300 deaths from more than 81,000 infections.

In a note to clients, Capital Economics said "a lot more easing will be needed, especially on the fiscal front, to help the economy return to its pre-virus trend".

Global policymakers have rolled out unprecedented stimulus measures in the past few weeks, cutting rates sharply and injecting trillions of dollars to backstop their economies as many countries have been put under tight lockdowns to contain the pandemic.

Chief economist Yan Se at Founder Securities in Beijing, said the rate cut was China's commitment to a pledge it made during a meeting of the Group of 20 (G-20) major economies last week to combat the coronavirus and stabilise financial markets.

"China was the only major economy that had not yet implemented large-scale easing measures," Mr Yan said, noting that many other nations have implemented more drastic steps such as quantitative easing and deeper cuts to benchmark rates.

Leaders of the G-20 pledged last Thursday to inject over US$5 trillion (S$7.1 trillion) into the global economy to limit job and income losses from the coronavirus, which has so far infected more than 700,000 people and killed nearly 34,000 worldwide.

Earlier in the day, the PBOC injected 50 billion yuan (S$10 billion) into money markets through seven-day reverse repos, breaking a hiatus of 29 trading days with no fresh fund injections.

Chinese 10-year government bond futures initially responded positively to the cut, with the most-traded contract for June delivery rising as much as 0.23 per cent, before pulling back to last trade down 0.1 per cent.

Markets economist Xing Zhaopeng at ANZ in Shanghai said the latest cut follows the ruling Communist Party's Politburo meeting last Friday.

"The medium-term lending facility rate and loan prime rate (LPR) will be cut at the same pace ... We believe this cut is a signal to urge all loans to refer to LPR as the benchmark so that the PBOC can improve the effectiveness of monetary policy transmission," he said.

At last Friday's meeting, the Politburo said the government will step up policy measures and tighten enforcement in a bid to achieve full-year economic and social development targets.

The coronavirus hit the Chinese economy just as it was starting to show some signs of stabilising after growth cooled last year to its slowest pace in nearly 30 years amid a trade war with the United States.

Analysts expect China's economy to contract sharply in the first quarter due to widespread disruptions to business and consumer activity caused by the virus as the authorities put in place tough public measures to contain the pandemic.

Nomura lowered its annual gross domestic product (GDP) growth forecast for China to 1 per cent this year, from 1.5 per cent previously, and adjusted quarterly GDP forecasts to a 9 per cent annual contraction, from an earlier prediction of 0.9 per cent contraction.


A version of this article appeared in the print edition of The Straits Times on March 31, 2020, with the headline 'China unexpectedly cuts key rate, pumps $10b into virus-hit money markets'. Subscribe