Coronavirus: Fed rate cut has ‘opened the window’ for China to pursue more aggressive economic policy
- After the US Federal Reserve’s surprise 50 basis point cut to interest rates – the biggest since the global financial crisis – China is tipped to follow suit
- Central bank expected to embark on more aggressive monetary loosening to counter coronavirus impact on economy, according to state newspaper editorial
The US Federal Reserve’s surprise half-point cut to interest rates has paved the way for China’s central bank to further loosen monetary policy, as it seeks to steady an economy reeling from a novel coronavirus outbreak.
“It is a relatively good choice [for China] to adjust policy rates amid a wave of rate cuts by major central banks,” read the article, published by the official Xinhua news agency.
The very public pronouncement echoed an increasingly loud chorus of analysts pushing for the PBOC to act more boldly, after its US peers made the biggest cut since the global financial crisis more than a decade ago.
China's central bank held a teleconference on Tuesday with delegates from the China Insurance and Banking Regulatory Commission, the Ministry of Finance and all major lenders, discussing how to offer financial support to the economy.
A PBOC statement said China would stick to its “prudent monetary policy stance” although the implementation will be “more flexible”. In particular, the central bank said it would fully maximise the Loan Prime Rate regime, but it did not mention benchmark interest rates.
The central bank also said China will not “use the property market as a means to stimulate short-term growth” and urged local authorities to keep consistent property funding policies, an apparent move to defy speculation that China would significantly relax mortgage rules.
Yet, the central bank has not changed the benchmark one-year lending and borrowing rates since 2015. Instead, it has relied on small tweaks – including injecting banks with cash – to try to guide the economy through a tumultuous two-year period in which growth slowed to new lows amid a bruising trade war with the United States.
The PBOC skipped open-market operations on Wednesday and stated that the liquidity in China’s banking system is sufficient.
China’s central bank will continue to cut the policy rate or loan prime rate in small steps to help Chinese businesses.
Despite the growing clamour for decisive action, some analysts do not expect groundbreaking policy shifts immediately.
“China’s central bank will continue to cut the policy rate or loan prime rate in small steps to help Chinese businesses. But it could wait one or two months to see the results of production resumption and the assessment of economic damage to decide if the benchmark rate should be cut,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank, adding that China has typically preferred credit easing over rate cuts.
This may limit the PBOC’s appetite for serious rate cuts, said Zhang Yu, chief macro analyst at Huachuang Securities, who added that “China does not necessarily need to follow the US steps if the stock market does not fall too much and epidemic does not deteriorate”.
The PBOC’s deputy governor, Liu Guoqiang, last week told a media briefing that “as one of the few major economies with normal monetary policy, we still have ample policy room and sufficient reserves in our toolkit,” suggesting that there are other tools available for the central bank.
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