Some analysts thought the solid trade performance by China in March meant the country was escaping the slump triggered by the coronavirus outbreak in January and the lockdown that lasted through March.
Those thoughts were shown to be pie in the sky thinking by China’s central bank on Wednesday which cut the interest rate on its key medium-term funding for financial institutions to the lowest on record.
The People’s Bank of China (PBOC) said it was lowering the one-year medium-term lending facility (MLF) loans to financial institutions to 2.95%, the lowest since the liquidity tool was introduced in September 2014, down 20 basis points from 3.15% previously.
That rate is still well above similar rates elsewhere among major economies.
The justification was to help the financial system handle the impact of COVID-19 and the lingering aftermath, as well as allowing banks especially to fund themselves more cheaply as the second wave impact on the economy emerges with a sharp fall in export orders in coming months.
China is due to release its March quarter GDP estimate and data on production, retail sales, investment and spending on real estate on Friday – the data will not be pretty.
Analysts Wednesday’s cut should pave the way for a similar reduction to the country’s benchmark loan prime rate (LPR), which will be announced on April 20 to further lower financing costs for companies hit by the pandemic. The LPR is the benchmark interest rate than all new and existing bank loans are priced off.
In a statement, the central bank said that it was also injecting 100 billion yuan ($US14.19 billion) through the liquidity tool.
China’s central bank said earlier in the month it was again cutting the amount of cash that small banks must hold as reserves to shore up the economy, which has been badly jolted by the coronavirus crisis.
The first phase of the cut came into effect on Wednesday, freeing up around 200 billion yuan ($IS28.37 billion) of long-term funds, the PBOC said in a statement on Wednesday. It did not comment on the MLF rate cut.
China is due to release its first-quarter GDP data and activity indicators on Friday. Analysts are forecasting the world’s second-largest economy to suffer a 6.5% year-on-year contraction in the first quarter, which would mark the first quarterly contraction in more than 30 years.
The latest forecasts from the IMF suggest that the US economy will contract by 5.9% this year. In comparison, the eurozone is expected to shrink by 7.5%, but China is seen growing by 1.2% in 2020, down from 6.1% in 2019.
Economists see contractions for the first and second quarters and a recovery later in the year.
Meanwhile, data emerged on Wednesday showing Chinese airlines lost $US4.8 billion in the first quarter as the coronavirus pandemic hit travel demand.
The country’s aviation regulator said two-thirds of the loss happened in February.
But pressures continued into March when the total number of passengers fell 71.7% from a year earlier to 15.13 million. That was better (but not by much) than the 84.5% slump experienced in February.
