China Cuts Interest Rates On Loans From Banks

The People's Bank of China has launched another economic measure to alleviate the adverse effects of the pandemic on the country. It would cut the imposed interest rate on loans from banks by the largest margin by injecting 50 billion yuan into the country's financial system. The measure would help its citizens prevent further financial losses and enable their capacity to pay their obligations amid the crisis.

Last Monday, the People's Bank of China (PBOC) announced the launch of 50 billion yuan to reverse repurchase operations and lowered the seven-day reverse repurchase rate. The interest threshold is now at 2.20 percent from 2.40 percent.

According to senior China economist at Capital Economics Julian Evans-Pritchard, the present-day interest rate was the lowest cut that the PBOC imposed since 2015. He claimed that offering funds at a lower rate enables the PBOC to keep market interbank rates at a controllable state even when the liquidity from the reserve requirement ratio cuts absorbed by the banking system.

The report claimed that the pandemic has caused economic troubles for businesses and consumers particularly those engaged with export-dependent China. The economic strategy imposed came after governments and central banks worldwide eased their monetary policies to cope with the adverse effects of the pandemic. These measures cost governments trillions to counter the economic impact of the crisis. Forecaster's warnings have realized as the International Monetary Fund (IMF) declared that the world is experiencing a deep recession.

Last Friday, the Chinese Communist Party imposed stronger counter-cyclical policy measures. It suggested the fiscal deficit ratio to increase, special treasury bonds to be issued, and uphold quota for local government special bond issuance. Effective loan rates were also guided down to maintain reasonable and enough liquidity.

However, the report claimed that the PBOC's move last Monday has had little impact on market sentiment. Shanghai's key stock index continued to decline to one percent in the afternoon today. Analysts have also cut their growth forecasts for China due to the containment measures imposed by the government.

On the other hand, S&P Global Ratings have revised its economic growth estimate for China's GDP growth by half. It now only assumes a 5.7 percent growth rate. According to ANZ Research economists Raymond Yeung and Xing Zhaopeng, the PBOC's interest rate cut may extend to lower rates of Chinese corporates' funding costs. They expect that the imposition would be realized after the interest rate cuts in the medium-term lending facility rates and the loan prime rate.