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AFP
February 21, 2020

China cuts benchmark lending rate as economy struggles

Business

AFP
February 21, 2020

Beijing: China cut the benchmark lending rate on Thursday as the authorities move to lower financing costs for businesses and support an economy jolted by a severe coronavirus outbreak.

The reduction in the loan prime rate (LPR) -- one of the preferential rates commercial banks give to their best customers and which serves as a reference for other lending rates -- is the latest measure to help companies struggling through the epidemic.

The one-year LPR was lowered to 4.05 percent from 4.15 percent, the People´s Bank of China (PBoC) said in a statement.

The five-year LPR -- on which many lenders base their mortgage rates -- was also lowered to 4.75 percent from 4.8 percent.

The LPR, released on the 20th of every month, is based on rates of the central bank´s open market operations, especially medium-term lending facility rates.

The LPR cut followed a similar move in the central bank’s medium-term lending rate on Monday. Investors are betting the authorities will roll out more monetary easing and fiscal stimulus in the near term to help smaller businesses that are struggling to tide over the crisis.

The rate reduction comes as Beijing battles to control a virus epidemic that has infected more than 74,500 people in the country.

Mayank Mishra, macro strategist at Standard Chartered Bank in Singapore, told Reuters that the LPR cut may not be enough to overcome the economic impact of the virus.

“The Chinese authorities are sending a message that easing will happen, but it will happen at a measured pace. They do not want fuel expectations that they will be easing aggressively,” Mishra said.

“We expect more monetary easing in the form of 100 basis points in the reserve requirement ratio (RRR) and 10 basis points in the medium-term lending facility (MLF) in addition to what we’ve already seen.” China's yuan weakened to a more than two-month low against the dollar after the LPR cut, mainly pressured by further easing expectations.

The outbreak is threatening to put a dent in the global economy, with China paralysed by vast quarantine measures and major firms such as iPhone maker Apple and mining giant BHP warning it could damage bottom lines.

On Thursday, the commerce ministry told an online press briefing that the epidemic would have a large impact on short-term consumption, with the strongest hit to be felt in February. But it said there was hope for consumer spending "to bottom out and stabilise in March", said Wang Bin, deputy director of market operations at the ministry.

Wang said authorities were stepping up targeted support measures for firms, without giving further details. The central bank said earlier this month it would offer a 300-billion-yuan ($43-billion) boost to help businesses involved in fighting the epidemic.

Julian Evans-Pritchard of Capital Economics said the rate cut would "help companies weather the damage from the coronavirus at the margins".

But he said the ability of firms to postpone loan repayments and access loans on preferential terms would be more important in the short-term.

"We expect the People´s Bank to continue loosening monetary conditions in the coming weeks, especially given signs that the coronavirus disruptions have started to weigh on employment," he said.