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November 21, 2019

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China trims key rate to push banks to support small and medium firms

CHINA lowered its lending benchmark rate yesterday to reduce company funding costs.

The cut was the second to a key Chinese rate this week and came a day after central bank governor Yi Gang said Beijing would step up credit support and lower real lending rates.

The pruning of the loan prime rate yesterday followed China’s first cut in a short-term market rate in four years on Monday, as authorities push banks to keep supporting cash-strapped small- and medium-sized businesses.

The one-year LPR, a rate set by the People’s Bank of China based on quotes from a panel of banks, fell five basis points to 4.15 percent from 4.20 percent in October. The five-year LPR was lowered by the same margin to 4.80 percent from 4.85 percent.

The LPR is a lending reference rate set monthly by 18 banks. The PBOC revamped the mechanism to price LPR in August, loosely pegging it to the MLF rate.

The one-year LPR has now been reduced three times since it became the official lending benchmark in August, and this week’s twin cuts suggest the PBOC is keen to push ahead with lowering financing costs. The five-year rate is used to price housing mortgages.

The PBOC has cut banks’ reserve requirement ratios seven times since early 2018 to free up more funds for lending.

The cut in the LPR was the third to a major policy rate this month, though the moves have been much more modest than easing by the US Federal Reserve and some other central banks.

On Monday, the PBOC unexpectedly trimmed the seven-day reverse repurchase rate to 2.50 percent from 2.55 percent, which followed a cut in its medium-term lending facility just two weeks ago.

Analysts and traders believe policy-makers are signalling to nervous markets that they remain ready to act to prop up growth, despite a recent spike in consumer inflation.

Meanwhile, PBOC on Tuesday reiterated the importance of the financial sector in serving the real economy.

At a PBOC meeting presided over by central bank governor Yi Gang, participants of the conference agreed that the financial sector had offered steady support to the real economy in 2019.

However, achieving stable macro-economic and financial operation still faces challenges, economic downward pressure continues to increase, and social credit still faces partial pressure of contraction, according to a statement released after the meeting.

Yi said continued efforts should be made to strengthen counter-cyclical adjustments and beef up credit support for the real economy. He underscored that the increases in M2 money supply and aggregate financing should be in keeping with nominal GDP growth.

The M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 8.4 percent year on year to 194.56 trillion yuan (US$27.7 trillion) at the end of October, PBOC data showed.

The M2 growth was the same as that at the end of September but was 0.4 percentage points higher than the same period last year. Its growth this year basically matched that of nominal GDP growth.

China will continue to implement a prudent monetary policy and see banks contribute more to financing the real economy, according to the statement.

Yi also urged giving full play to the role of the LPR mechanism in bringing down real loan interest rates as well as continued efforts in improving banks’ lending capacities by replenishing capital.




 

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