Commercial lenders in China have been offered medium-term funding to reduce interest rates in charges for money. China’s Central Bank made this move to cushion the effect of the coronavirus in the country.
On Monday, the Chinese Bank offered a medium-term loan of $29 billion (200 billion yuan) which is valid for one year.
The rate was reduced to 3.15% which became the lowest since 2017. The Bank equally offered funds of about 100 billion yuan for the 7-day reverse repurchase agreements. It would result in the withdrawal of 700 billion yuan from the market when the 1 trillion reverse repos yuan matures today.
Although the amount of injection is small, the rate of reduction meets the “inline of expectations”. According to an analyst at Huachuang Securities, Zhou Guannan, there are expectations for additional MLF, which may be supplied next month.
After the coronavirus outbreak at the start of the New Year, the Chinese Government and its Central Bank have been announcing early bond sales, small rate cuts, and other measures that could support companies and calm financial markets. As it stands, there is a heavy increase in stimulus, but that could change when and if the epidemic disease is brought under control.
Expected rate to fall
Today’s rate cut could be similar to a previous rate cut in loan prime rate, based on household and business loans. According to a recent survey by Bloomerang, economic experts are expecting the 1-year loan rate to reduce by 10 basis points at the announcement on February 20.
Chinese 10-year government bonds fell 0.27% shortly after the operation while the 10-year yield increased by 3 basis points to 2.90%.
Macro Strategy head at Standard Chartered Plc, Becky Liu, said the injection is quite small. She added that the operation would minimize the incentive to pursue policy banknotes and Chinese government bonds.
She further stated that it could mean that PBOC would not be lowering front-end rates henceforth.
According to Becky, most investors are not really concerned about the lack of volatility considering the present market conditions, because it’s certain that PBOC may lower front-end rates at a time.
To collaborate her opinion, economic analysts at Commerzbank AG, Zuo Hao, said that from today’s operation, any reduction in bonds would provide an opportunity for investors to get more debts. He, however, noted that the current situation regarding the handling of coronavirus disease would have a lot to do with investors’ response.