February 22, 2020 / 2:42 AM / 3 months ago

China's central bank vows to take more steps to support virus-hit economy

SHANGHAI/BEIJING (Reuters) - China’s central bank will take further steps to support the virus-hit economy, including releasing more liquidity and lowering funding costs for companies, a vice governor of the bank told state media.

Workers transport a container from a China-Europe freight train that departed from Russia's Omsk, at a cargo terminal in Ulanqab, Inner Mongolia Autonomous Region, China February 20, 2020. China Daily via REUTERS

The People’s Bank of China (PBOC) will guide market interest rates lower, Liu Guoqiang, the bank official, told the Financial News in an interview.

“China’s monetary policy space is still very sufficient, and the toolbox is also sufficient. We are confident and able to offset the impact of the epidemic,” Liu told the newspaper.

The PBOC also will release more liquidity to some banks due to annual changes in assessments of targeted reserve requirement ratio (RRR) cuts, which will free up more funds to lend to smaller firms, Liu said.

The virus and widespread transportation lockdowns put in place to contain it have caused significant disruptions to economic activity in China, with smaller, private firms such as restaurants particularly vulnerable because they have less cash on hand to tide themselves through until business recovers.

“In the near future, there will be dynamic adjustments in targeted RRR reductions for inclusive financing. More qualified banks are expected to enjoy preferential policy support, as more liquidity will be released into the banking system,” Liu said.

In January 2019, the central bank released about 250 billion yuan ($35.58 billion) in additional cash to banks, due to changes in assessments for banks’ targeted RRR reductions announced in 2018.

The central bank will push down lending rates, especially for smaller firms, by further improving the transmission mechanism of the loan prime rate (LPR) - its new benchmark lending rate, Liu said.

But Liu reiterated that the central bank will not resort to “flood-like” stimulus.

China has cut several of its key rates in recent weeks, including the benchmark lending rate on Thursday, and has urged banks to give cheap loans and payment relief to companies which have been hardest hit by the outbreak.

Analysts widely expect further monetary and fiscal support measures in coming weeks, while stressing the key near-term policy challenge will be finding ways to keep companies afloat until demand recovers.

Benchmark deposit rates will also be adjusted at an appropriate time, Liu said. Speculation had been growing that a cut was being considered, which would lower banks’ funding costs and give them more incentive to lower rates they charge for loans.

Liu said that the epidemic’s impact on China’s economy would be limited, and that Beijing would strive to meet economic and social development targets this year.

Chen Yulu, another vice central bank governor, said the country is fully confident it beat the epidemic, state media reported on Saturday.

“We believe that after this epidemic is over, pent-up demand for consumption and investment will be fully released, and China’s economy will rebound swiftly,” Chen said.

China’s economic growth may show a sharp slowdown in the first quarter, probably dipping to 3% or even lower from 6% in the previous quarter - which was the weakest pace in nearly 30 years, economists estimated.

Some forecasters also say there is a growing risk the economy could contract in the first quarter from the previous three months, as factories have been slower to resume production than expected due to shortages of staff and raw materials.

The central bank also is closely monitoring consumer prices, which could be disturbed by the virus epidemic, Liu said.

Seasonal factors and the virus’ impact were behind the flat M1 money supply, or cash in circulation plus corporate demand deposits, in January from a year earlier, Liu said.

Liu also said China’s economic fundamentals were sound, adding it had ample foreign currency reserves to support its yuan currency.

Reporting by Samuel Shen, Leng Cheng and Kevin Yao; Editing by Kim Coghill and Gerry Doyle

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