With key rate cuts, China ramps up stimulus to bolster economy

China’s market-based benchmark lending rate lowered yesterday, another sign that the country is determined to channel funds into the real economy via more flexible monetary policy, analysts said.

The one-year loan prime rate fell 20 basis points from a month earlier to 3.85 percent, while the above-five-year LPR fell 10 basis points from the previous reading to 4.65 percent, according to the National Interbank Funding Center run by the People’s Bank of China, the central bank.

The reduction is in line with market expectations, as a key meeting last Friday decided to guide market interest rates lower as part of a broader policy package to cushion against the economic fallout of COVID-19.

That the declines between the one-year and above-five-year LPR differed demonstrated China’s resolve to offer targeted monetary support for the real economy other than real estate speculation, said Wen Bin, a chief researcher with China Minsheng Bank.

Rather than resorting to massive stimulus plans to shore up an economy faced with unprecedented challenges, China has vowed targeted and accurate measures to help firms tide over the difficult period.

To support the real economy, especially medium-sized, small and micro-enterprises, China will step up the use of tools including reserve requirement ratio cuts, interest rate cuts and reloans, according to the meeting of the Political Bureau of the Communist Party of China Central Committee.

Including yesterday’s reduction, China’s one-year LPR has dropped by a total of 40 basis points since last August when it unveiled a key reform to use the LPR to better reflect market changes and steer borrowing costs lower to support the real economy.

The raft of measures have taken effect in boosting market liquidity. In the first quarter, the new yuan-denominated loans hit 7.1 trillion yuan (US$1 trillion), the highest quarterly level in history, said the central bank, adding that the credit structure has been optimized and the credit support is becoming more targeted and effective.

Yet, the PBOC’s current approach is more moderate and measured than the US Federal Reserve’s bold moves such as steep rate cuts and quantitative easing, said Ren Zeping, chief economist of Chinese property developer Evergrande.

The “ammunition” in China’s monetary policy toolbox is sufficient, said Ming Ming, an analyst with CITIC Securities, noting that with improved structural tools, intensified financial regulation and optimized capital flow, a deluge of strong stimulus policies similar to those favored by the country during the 2008 global financial crisis may not appear.

Ping An Securities analyst Zhang Ming said the government has stepped up its de-leveraging campaign to defuse financial risks since 2016, and it will refrain from a massive monetary and credit stimulus package.

China will also lean on fiscal stimulus to spur infrastructure investment and consumption as stimulating domestic demand plays the main role in pumping up the economy, analysts said.

According to IMF, China is expected to be one of the few major economies that could see economic expansion this year, while it projected the global economy to decline by 3 percent.