China slashes rate, pumps $7 billion into market to counter virus

China’s central bank on Monday cut an interest rate on loans to banks by the largest margin in five years and injected 50 billion yuan ($7 billion) into the financial system to help the world’s second-largest economy weather the coronavirus impact.

The People’s Bank of China (PBoC) said it launched a 50-billion-yuan reverse repurchase operation on Monday and lowered the seven-day reverse repurchase rate from 2.40 per cent to 2.20 per cent.

It was the “largest cut since 2015 and takes the 7-day reverse repo rate to its lowest on record”, said Julian Evans-Pritchard, senior China economist at Capital Economics.

“By offering funds at a lower rate, the PBoC will be able to keep market interbank rates low even as the liquidity from the RRR (reserve requirement ratio) cuts is absorbed by the banking system,” he said, referring to an earlier lowering of the amount of cash lenders must keep in reserve.

The deadly pathogen has claimed almost 40,000 lives worldwide, hitting businesses and consumers, and its global spread has dampened hope of a quick recovery in export-dependent China, where the pandemic first erupted in December.

The latest move comes as governments and central banks around the world ease monetary policy and unveil titanic stimulus measures worth around $5 trillion to counter the economic impact of the pandemic, which forecasters warn will cause a deep recession. The Communist Party’s decision-making politburo also called last Friday for stronger counter-cyclical policy measures and a step-up in stimulus.

The politburo said where appropriate, the fiscal deficit ratio should be raised, special treasury bonds should be issued, and that there should be an increased quota of local government special bond issuance, China’s official Xinhua News Agency reported.

Effective loan rates should also be guided down, “maintaining reasonable and sufficient liquidity”, officials added.

Monday’s move appears to have had little impact on market sentiment, with Shanghai’s key stock index about one per cent lower in the afternoon.

As COVID-19 ravages the global economy, analysts have cut growth forecasts for China, which was the first to see the effects from containment measures aimed at halting its spread.

S&P Global Ratings said its revised economic growth estimate for China in 2020 is now almost half its pre-outbreak growth assumption of 5.7 per cent.

ANZ Research economists Xing Zhaopeng and Raymond Yeung said in a note that the PBoC’s rate cut “is intended to lower Chinese corporates’ funding costs”.

They expect it will be followed by cuts in the medium term lending facility rates and loan prime rate.

Meanwhile, China’s largest state banks said the impact of restrictions on movement imposed to slow the spread of the coronavirus could pull down asset quality as borrowers struggle to repay loans, though they are likely big enough to weather any fallout.

The comments come as four of the country’s largest state-backed lenders posted estimate-beating fourth-quarter profit - but they bode ill for smaller lenders, who have less capital reserves and can call on fewer state borrowers. The outbreak beginning at the end of last year has left many airlines, hotels and other businesses fighting to survive after government countermeasures all but paralysed economic activity for over a month.

China’s largest lenders - Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB) and Bank of Communications Co Ltd (BoCom) - posted annual profit growth of over 4% for 2019 due in part to improving asset quality.

Separately, activity in China’s vast manufacturing sector likely remained in contraction in March, though it was set to stabilise slightly from the coronavirus-led collapse that virtually paralysed the world’s second-biggest economy.

Analysts have warned that any recovery would be shallow as the coronavirus has rapidly spread to many countries, leaving the global economy vulnerable to a deep recession. China’s official manufacturing Purchasing Manager’s Index (PMI) is forecast to rise to 45 in March, from a record low of 35.7 a month earlier, according to the median forecast of 18 economists polled by Reuters. Despite the partial improvement, the reading is still below the 50-point mark that separates monthly growth from contraction, with the pace of contraction equalling that during the depth of the global financial crisis.

Beijing, at great costs to the economy, had imposed draconian quarantine rules and travel restrictions to curb the spread of the coronavirus that has killed more than 3,000 in the country. But as locally transmitted infections dwindle, most businesses have reopened and life for millions of people has started to slowly return to normal.

Global equity benchmarks rose slightly on Monday despite a drop in oil prices to their lowest levels since 2002, as central banks and the United States tried to contain damage from the rapidly spreading coronavirus that has upended the global economy.

Agencies