Cen­tral bank cuts in­ter­est rates to boost real econ­omy

China Daily (Hong Kong) - - FRONT PAGE - By CHEN JIA chen­jia@chi­nadaily.com.cn

China’s mone­tary au­thor­i­ties low­ered in­ter­est rates of ma­jor lend­ing fa­cil­i­ties, given a pro­jec­tion of mod­er­ate con­sumer in­fla­tion in com­ing quar­ters, in sup­port of credit to smaller busi­nesses hit by the novel coro­n­avirus pan­demic.

“The prob­a­bil­ity of an ob­vi­ous in­fla­tion re­bound is low, and the con­sumer price in­dex is pre­dicted to drop grad­u­ally by quar­ter this year,” a group of cen­tral bank of­fi­cials wrote in an ar­ti­cle pub­lished on Wed­nes­day.

Based on the pro­jec­tion, the Peo­ple’s Bank of China, the coun­try’s cen­tral bank, de­cided to cut the in­ter­est rates of the re-lend­ing and re­dis­count lend­ing fa­cil­i­ties as of the be­gin­ning of July.

Cut­ting the rates is a sig­nal of eas­ing money sup­ply to ben­e­fit the real econ­omy, al­though some PBOC of­fi­cials re­cently hinted at with­draw­ing spe­cial mone­tary stim­u­lus mea­sures, given that the pan­demic is al­most un­der con­trol in China and eco­nomic re­cov­ery in the sec­ond quar­ter was strong, ac­cord­ing to an­a­lysts. Those spe­cial mea­sures were im­ple­mented to boost the econ­omy when COVID-19 hit.

The one-year in­ter­est rate charged by the PBOC’s lend­ing to fi­nan­cial in­sti­tu­tions that take de­posits — called the re-lend­ing rate — de­creased by 0.25 per­cent­age point to 2.25 per­cent. That is aimed es­pe­cially at in­creas­ing cheaper credit for agri­cul­tural and small firms. Mean­while, the re­dis­count rate dropped by the same ex­tent to 2 per­cent, the cen­tral bank said.

The bank also low­ered the in­ter­est rates of re-lend­ing for fi­nan­cial sta­bil­ity pur­poses by 0.5 per­cent­age point to 1.75 per­cent, a cen­tral bank state­ment showed.

It’s the first time in a decade that the PBOC has ad­justed the rate of re­dis­count, a mone­tary pol­icy tool to sup­port banks’ com­mer­cial pa­per fi­nanc­ing and re­plen­ish liq­uid­ity. Com­mer­cial pa­per is a type of prom­is­sory note to finance short-term credit for large in­sti­tu­tional buy­ers.

In China, the re­dis­count fa­cil­ity has been an im­por­tant mea­sure since 1995. It was used orig­i­nally to solve corporate loan delin­quen­cies by pro­vid­ing ready ac­cess to fund­ing.

The cen­tral bank said it will use flex­i­ble and ap­pro­pri­ate mone­tary pol­icy in pur­suit of its in­fla­tion sta­bil­ity man­date. With the im­pact of COVID-19, in­ten­si­fied in­fla­tion or de­fla­tion needs to be pre­vented dur­ing the eco­nomic re­cov­ery, ac­cord­ing to the ar­ti­cle from PBOC Mone­tary Pol­icy Depart­ment.

“In the sec­ond quar­ter, the out­put is pre­dicted to re­turn to a nat­u­ral growth level, and the nar­rowed out­put gap will help to sta­bi­lize prices,” it said.

Lower in­ter­est rates for the lend­ing fa­cil­i­ties in­di­cated that the stance of eas­ing mone­tary pol­icy has not yet been re­versed. Still, mar­ket par­tic­i­pants have been wor­ry­ing about mone­tary tight­en­ing since mid-April given ris­ing in­ter­bank rates and govern­ment bond yields, said Ming Ming, a se­nior re­searcher at CITIC Se­cu­ri­ties.

The cen­tral bank ar­ranged a quota of 1.8 tril­lion yuan ($254.8 bil­lion) for re-lend­ing and re­dis­count after the COVID-19 out­break, and part of

the quota had not yet been used as of Wed­nes­day, ac­cord­ing to the PBOC.

The cen­tral bank is likely to in­crease the use of such struc­tural tools rather than flood­ing the econ­omy with liq­uid­ity in or­der to im­prove the ef­fi­ciency of the mone­tary pol­icy trans­mis­sion mech­a­nism. The mea­sures can also pro­vide credit di­rectly to the real econ­omy, said Yan Se, chief econ­o­mist at Founder Se­cu­ri­ties.

At an ex­ec­u­tive meet­ing in midJune, the State Coun­cil re­quired fi­nan­cial in­sti­tu­tions to con­vey 1.5 tril­lion yuan of their prof­its to firms to help them sur­vive the COVID-19 pan­demic.

Meet­ing par­tic­i­pants also called for cut­ting the re­serve re­quire­ment ra­tio — the pro­por­tion of cash that fi­nan­cial in­sti­tu­tions must keep on de­posit — to main­tain am­ple and rea­son­able liq­uid­ity.

Lou Feipeng, a se­nior econ­o­mist at Postal Sav­ings Bank, said that un­der the mea­sures, banks will be able to ob­tain funds from the PBOC at lower costs, and real lend­ing rates will con­tin­u­ally de­crease in the com­ing months.

“We ex­pect to see a broad-based cut to China’s re­serve re­quire­ment ra­tio by 50 ba­sis points in the third quar­ter, or an equiv­a­lent amount of liq­uid­ity in­jec­tion via tar­geted RRR cuts or other mea­sures such as the cen­tral bank’s re-lend­ing and re­dis­count pro­gram,” said Ding Shuang, chief econ­o­mist for Greater China and North Asia at Stan­dard Char­tered.

He es­ti­mated that China will cut the in­ter­est rate on the medium-term lend­ing fa­cil­ity by 10 ba­sis points in the third quar­ter, which will en­cour­age lower loan prime rates.

Newspapers in English

Newspapers from China

© PressReader. All rights reserved.