The Chinese Central Bank intervenes to support the economy

The Chinese Central Bank (PBOC) cut interest rates on its one-year loans to financial institutions on Monday as Beijing struggles to support the recovery of an economy crippled by the epidemic of the new coronavirus.

This measure will reduce the financing costs of commercial banks, a way to ease the pressure they face and encourage them to extend more credit on more favorable terms to businesses.

The PBOC offered 200 billion yuan (28.1 billion francs) to banks on Monday in the form of one-year medium-term loan facilities (MLFs) on improved terms.

The requested interest rate was therefore lowered to 3.15%, the lowest since 2017, compared to 3.25% previously. The objective is in particular “to guarantee abundant and reasonable liquidity in the financial system”, according to the institution.

Ultimately, “this is an additional measure to help banks and borrowers cope with the economic disruption generated by the epidemic,” observed Julian Evans-Pritchard, analyst at Capital Economics.

The central bank had already lowered its rates for its short-term loans (seven and fourteen days) two weeks ago to help financial institutions. Monday’s adjustment will give them greater visibility.

Above all, according to analysts polled by the Bloomberg agency, the PBOC could also reduce another crucial rate on Thursday: the “loan prime rate” which is the benchmark for the most advantageous rates that banks can offer to businesses and households.

The Chinese economy remains largely paralyzed by the containment measures and drastic restrictions imposed across the country to stem the epidemic.

Many small businesses – lack of supplies, workers or customers – are still struggling to restart their business and are threatened with running out of cash.

The CBRC, the Chinese policeman in the banking sector, had called on Saturday the commercial banks to increase their credits by keeping the cost of credit “at a reasonable level”, adding that a larger ratio of “bad debts” would be tolerated in their balance sheet .

However, PBOC measures could prove insufficient to swell the volume of credit, warns Julian Evans-Pritchard, anticipating further monetary and regulatory easing.

“Especially since many of the most affected firms are small private companies that are already struggling to get bank loans or access the bond market”, the banks being reluctant to advance funds to them, he said. He underlines.

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