[Asia Economy Beijing=Special Correspondent Park Sun-mi] China has cut the reverse repurchase (reverse repo) rate by the largest margin in five years. This move is being seen as a 'surprise' rate cut aimed at boosting the economy hit by the spread of COVID-19.
On the 30th, the People's Bank of China announced that it had lowered the 7-day reverse repo rate from 2.4% to 2.2%. The liquidity supplied to the financial market through this reverse repo rate cut amounts to 50 billion yuan. The People's Bank of China stated, "We will maintain sufficient liquidity to support the real economy."
The People's Bank of China adjusts liquidity by purchasing government bonds or government-guaranteed bonds issued by commercial banks through reverse repo transactions, a short-term liquidity adjustment tool, and then reselling them at the agreed time. However, this is the first time in nearly five years that China has cut the reverse repo rate by 0.2 percentage points at once.
Since November last year, when the People's Bank of China cut the reverse repo rate for the first time in four years, it has maintained a continuous easing trend. Last month, the 7-day reverse repo rate was lowered from 2.5% to 2.4%, and the 14-day rate from 2.65% to 2.55%, making efforts to absorb shocks in the financial market through liquidity supply. Considering that rate cuts have typically been between 0.05% and 0.1% points, a 0.2 percentage point cut at once is seen as a somewhat bold move. This also reflects the significant economic shock caused by COVID-19 and the government's strong determination to recover from it.
Experts are paying attention to the fact that this measure came after the leaders of the Group of Twenty (G20) reached a consensus on cooperation for economic recovery during the special virtual summit on COVID-19 held last week.
Raymond Yeung, Chief Economist at Australia and New Zealand Banking Group, explained, "The larger-than-expected cut in the reverse repo rate expresses China's intention to join the global efforts to stabilize the economy." Yan Su, Chief Economist at Fangzheng Securities in Beijing, also said, "This rate cut was promised by China at the G20 meeting to stabilize the financial market. Many countries have implemented bold measures such as quantitative easing and benchmark rate cuts, but China has not taken such bold steps until now."
Furthermore, this move aligns with the direction emphasized by the Politburo, the central decision-making body of the Chinese Communist Party, during its meeting on the 27th, which focused on economic management and stressed the importance of preparing a package of stimulus policies including special bond issuance and expansion of fiscal deficit ratios.
Accordingly, the possibility of further liquidity easing by the Chinese government remains open.
Although China kept the 1-year Loan Prime Rate (LPR), which functions as the de facto benchmark interest rate, at 4.05% and the 5-year LPR at 4.75% on the 20th, it had taken measures to support liquidity for small and medium-sized enterprises and private companies facing funding difficulties by selectively lowering the reserve requirement ratio on the 16th. Additionally, the People's Bank of China has continued to absorb shocks in the financial market through liquidity supply by lowering both the 1-year Medium-term Lending Facility (MLF) rate and the LPR last month.
Nomura Securities expects that within the next few weeks, the People's Bank of China will cut the 1-year benchmark interest rate and the 1-year MLF lending rate by 0.25 percentage points each. Furthermore, if the COVID-19 shock is greater than expected, the cut could expand to as much as 0.50 percentage points.
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