The Chinese government has taken multiple steps so far to contain the economic fallout from the coronavirus epidemic, including interest rate cuts and financial injections worth billions of yuan. It did it again this week, extending the monetary easing provided by the central bank. With the budget under pressure, however, there are indications that Beijing may opt for some austerity measures later this year rather than a larger fiscal stimulus.
PBOC Cuts Interest Rates on Loans for Lenders
The People’s Bank of China (PBOC) injected 200 billion yuan (almost $29 billion) into the country’s banking system which has been experiencing liquidity issues over the past year. On Monday, the funds were offered as one-year medium-term loans for Chinese financial institutions, according to Reuters. The central bank also cut the interest rate on the money from 3.25% to 3.15%.
Furthermore, the PBOC added another 100 billion yuan ($14 billion) through seven-day reverse repurchase agreements, Bloomberg reported. 1 trillion yuan (over $143 billion) of reverse repos were due to expire on the first day of the week but in the end the measures resulted in a net 700 billion yuan (over $100 billion) withdrawal from the markets.
This week’s interest rate reduction was largely expected by observers. A similar cut in the benchmark loan prime rate, which serves to determine the price of corporate and household loans, is likely to follow later this month. Economists surveyed by Bloomberg expect the same 10-basis point decrease of the rate on 1-year loans.
These measures come in the wake of early February’s PBOC announcement that it’s going to spend 1.2 trillion yuan (over $170 billion) to support growth in the Chinese economy hit hard by the coronavirus epidemic.