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February 21, 2020

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Lower lending rate boosts liquidity, ease virus blows

CHINA’S new market-oriented benchmark lending rate fell yesterday, a boost to market liquidity and a boon for small- and medium-sized firms amid the fight against the novel coronavirus epidemic.

The one-year loan prime rate came in at 4.05 percent, down from 4.15 percent a month earlier, while the above-five-year LPR fell five basis points from the previous reading to 4.75 percent, according to the National Interbank Funding Center run by the People’s Bank of China.

The lower LPR, based on rates of the central bank’s open market operations and released on a monthly basis, is in line with market expectations as China continues to inject market liquidity to buffer the blow from the novel coronavirus outbreak.

The central bank lowered the interest rate for the medium-term lending facility, a major reference rate for the LPR, by 10 basis points on Monday, while injecting 300 billion yuan (US$ 42.8 billion) into the financial market through reverse repos and MLF.

Following the timely rate cuts of reverse repo and MLF since the beginning of February, a lower LPR will help firms weather the strains from the epidemic and reduce financing costs for the real economy, said Wen Bin, chief analyst at China Minsheng Bank.

Wen said the five-basis-point reduction in the above-five-year LPR will help bolster infrastructure investment and keep the property market stable, noting that investment will likely be a main growth driver in the near future.

In its latest monetary policy implementation report, the PBOC said the introduction of the LPR has helped push down the lending rate for new corporate loans on a larger scale.

As of February 14, China’s banks had provided over 537 billion yuan of credit support to help companies restore production amid the fight against the outbreak, official data showed.

The capital market has reacted positively toward the slew of fresh liquidity, with major stock benchmarks clawing back all losses from February 3, the first day of trading after the Spring Festival holiday.

The Shanghai Composite Index closed at 3,030.15 points and the Shenzhen Component Index at 11,509.09 points yesterday, both up from the close on the last trading day before the holiday.

Spikes in overseas capital inflow and global index provider MSCI’s inclusion of six more Chinese A-shares to its China A Onshore Index showcased global confidence in China’s financial market despite the epidemic.

The steady overseas buying of Shanghai’s A shares showed that global investors are upbeat about China’s handling of the outbreak, said Zhao Yayun, a researcher of the CITIC Foundation for Reform and Development Studies.

China is taking more targeted measures to resume production and support companies hit by the outbreak as the daily tally of new confirmed cases outside Hubei Province, the epicenter of the outbreak, dropped for the 16th consecutive day on Wednesday under stringent epidemic control measures.

The State Council executive meeting on Tuesday called for a multi-pronged approach to facilitate business operations and employment, while local authorities, including those in Shenzhen, Shanghai and Changchun in northeastern Jilin Province, offered to issue more policy-backed loans, further lower interest rates and discount interest payments for micro, small- and medium-sized companies.

The PBOC also pledged on Wednesday more monetary and credit support to combat the outbreak and efforts to smooth the transmission of the LPR mechanism.

“The implicit floor interest rate for loans will be resolutely eliminated,” the central bank said.


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