PBOC to supply cash to bring stability in virus-hit markets

Bloomberg

Chinese policymakers prepared to shore up financial markets, which are bracing for a sell-off when trading re-starts on Monday.
The People’s Bank of China (PBOC) and other regulators announced a slew of targeted measures over the weekend aimed at calming financial markets and helping companies, banks and individuals hurt by the viral pneumonia outbreak. The central bank will supply a net 150 billion yuan ($21.7 billion) to money markets on Monday, according to Bloomberg calculations based on a statement on Sunday.
The money will be supplied using reverse repurchase agreements to ensure liquidity is “reasonably ample” during the outbreak, according to the PBOC, which did not say the tenor of the contracts or the interest rate.
The total injection announced was 1.2 trillion yuan, the largest single-day addition of its kind in data going back to 2004. However, the net effect is much lower as there are more than 1 trillion yuan of short-term funds scheduled to mature on Monday.
“The central bank should be doing this to make sure the stock investors don’t panic too much as the market reopens,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp, adding it was a surprise they announced it before Monday. “The amount of the net injection isn’t huge. The PBOC may want to retain some flexibility, which means it can add more liquidity in the rest of the week if the sentiment is too bad.”
The economic impact of the disease outbreak is still unknown, although the effects of shutting down a large proportion of the nation’s economy for an extra week in an attempt to slow the virus’ spread will be substantial. The Sunday PBOC announcement follows a joint statement with other ministries and financial regulators on Saturday, which promised to use open market operations, the standing lending facility and other tools to ensure interbank liquidity is sufficient to keep money market rates stable.
The PBOC urged banks to increase lending to the whole economy, and said it will give the institutions 300 billion yuan in relending to help them provide more money to a list of affected companies. Banks were told they shouldn’t withdraw loans from firms affected by the virus, especially from smaller ones.
Banks should also consider rolling over loans or cutting interest rates to help affected companies, and regulators will allow those firms to delay reporting their results for 2019 and the first quarter of 2020.

Lending Boost
The new measures follow the announcement last week that China’s biggest banks will lower interest rates for firms in Hubei, the center of the outbreak. In the statement on February 1, financial institutions were told to maintain the pace of overall credit expansion and continue to lower borrowing costs across China, especially to manufacturers, and to small and private firms.
The PBOC will “keep close contact with financial institutions and financial markets to stay fully on top of the liquidity situation and demand,” PBOC Deputy Governor Pan Gongsheng said in an Q&A with the bank’s newspaper, Financial News, which was released at the same time as the announcement. The PBOC will “release policy information in a timely manner and guide market expectations,” he said.
Pan also said the central bank will temporarily waive the cap for foreign exchange settlement for companies in need, as long as it’s for reasons related to the virus.
The central bank will be less strict in its checks on banks’ required reserves at the end of January, and will facilitate companies’ use of foreign exchange to ensure that offshore borrowing isn’t impacted and goods needed to battle the virus can be imported without problems.
Looser Bond Rules
Exchanges were asked to streamline corporate bond sales including by allowing financial institutions to submit materials online, in a bid to reduce the spread of the virus. Any private bonds or asset-backed securities sold to finance the fight against the coronavirus will be approved using simplified procedures.
The impact of the outbreak will be temporary, the Chinese economy will maintain good momentum, and financial regulators have “full confidence” they can keep the economy stable in the long term, according to the statement. Investors should look at the long term and uphold the principle of value investing, and not get affected by “irrational sentiment.”
In a separate Q&A, Cao Yu, vice chairman of the banking and insurance regulator, also called for lower lending rates and fees and pledged to take steps to make sure companies’ financing demands were met, including by allowing banks to increase bond investment and set up more wealth-management companies. Firms with difficulties meeting the asset-management rules by the end of 2020 can have a suitable extension, Cao said.