Chinese banks pledge more stimulus

Bloomberg

Chinese banks lowered borrowing costs and the government promised to sell another 1 trillion yuan ($141.3 billion) in bonds to pay for stimulus spending after the economy had its first contraction in decades due to the coronavirus outbreak.
The one-year loan prime rate was set at 3.85% versus 4.05% in March, according to a statement from the People’s Bank of China. That followed a series of policy-loosening steps in the past month by the central bank aimed at cushioning the economic impact of coronavirus.
In a separate statement, the Ministry of Finance announced the new quota of special local bonds and promised they would be sold by the end of May. The money raised will mainly be used to pay for infrastructure spending.
China’s top leaders said last week that the nation is facing “unprecedented” economic difficulties and signalled that more stimulus was in the works. The meeting was held the same day as China announced that the economy contracted 6.8% in the first quarter and the nation’s outlook is also weak as the shutdown of other countries will likely hit demand for exports.
The yuan weakened to session lows in offshore trading after the rate cut announcement, falling as much as 0.15% versus the dollar to 7.0894. Chinese stock indexes were little changed in early action while 10-year government bond futures erased slight gains to trade 0.11% lower.
The 1 trillion yuan in new bonds adds to 1.29 trillion yuan of special local government bonds that have already been approved this year to finance infrastructure projects, such as roads and industrial parks. Local governments have sold almost 90% of the existing quota, a finance ministry official said.

China’s full-year fiscal policy has yet to be detailed, as the nation’s annual legislative meeting usually held in March, the National People’s Congress, was postponed due to the coronavirus. A new date hasn’t yet been announced.
“This shows an urgency of boosting infrastructure investment in order to support growth following the decline of first-quarter GDP,” said Becky Liu, head of China macro strategy at Standard Chartered Plc., adding this means the issuance of local-government debt will hit a record high in the coming weeks. “It is the most effective, immediate and certain way to boost economic growth in the short term.”
Some analysts had expected a cut of 20 basis points after the central bank trimmed several of its policy rates since the last LPR was set in March, and added liquidity to the financial system. The five-year tenor, a reference for mortgages, was cut to 4.65% on Monday versus 4.75% in March.
The rate cuts come after the central bank last week lowered the cost it charges on its 1-year funding to banks to a record low. The central bank also cut the cost of short-term open market operations in late March by the most since 2015, and announced a two-phase cut to the reserve ratio requirement for smaller banks.
The LPR has been considered China’s de facto benchmark funding cost since a reform last year. The rate decided by a group of 18 banks is released on or around the 20th of every month and is reported in the form of a spread over the interest rate of the central bank’s medium-term loans.
The steady decline in the LPR since August last year has led to lower borrowing costs in the wider economy. The one-year rate was last reduced by 10 basis points in February, when the 5-year metric eased five basis points.
“The LPR cut means banks are increasingly prepared to extend more affordable loans as their funding costs are lowered,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. “More easing is likely to come with a view to engineering a recovery in economic activity.”