Why is China lowering interest rates

China is lowering interest rates in the fight against the consequences of the virus epidemic

By Reuters Staff

Shanghai (Reuters) - China's central bank has cut interest rates further in the fight against the economic consequences of the virus epidemic.

She lowered the one-year reference interest rate (LPR) to 4.05 percent from 4.15 percent on Thursday. Experts had expected this step. According to insiders, the reserve requirements for banks (RRR) should also be relaxed further within weeks. This is supposed to get rid of more money for lending. It is also the declared intention of the central bank to provide companies with cheap loans that are involved in the process of preventing and controlling the coronavirus.

In China, the stock exchange prices rose sharply after the interest rate cut: The CSI300 of the most important stocks in Shanghai and Shenzhen gained more than two percent, the index of the Shanghai Stock Exchange 1.6 percent. "The signal from the Chinese authorities is that there will be more easing, but at a moderate pace," said economist Mayank Mishra of the Standard Chartered Bank in Singapore. Under no circumstances should the expectation be fueled in the markets that there will be aggressive steps.

"SMALL BUSINESSES THREAT TO LEAVE MONEY"

Economist Julian Evans-Pritchard from the analysis company Capital Economics points out, however, that the central bank measures will hardly alleviate the lot of millions of smaller companies that are suffering from the effects of the virus crisis. "Studies suggest that a third of these firms could run out of money in the next two weeks if business doesn't normalize."

As a precaution, the central bank recently reduced the interest rate for medium-term loans (MLP) by ten points to 3.15 percent. This is to facilitate credit transactions worth billions. The central bank expects the virus crisis to have only a limited impact on the economy. China also does not want to be dissuaded from its growth targets.

The crisis is also affecting the emerging market economy, which has also been weakened by the trade conflict with the USA and which has long since abandoned the turbo growth of earlier years. In view of the slowdown in the economy, China's central bank has already taken action several times: it has lowered the reference interest rate in several steps since summer 2019. Since the beginning of 2018, the PBOC has also continuously reduced the reserve requirements.

China announced a far-reaching interest rate reform in August 2019. Among other things, the central bank wants to ensure that financial institutions pass on the reference rate LPR to their customers, which tends to be lower than the classic key rate at which commercial banks can borrow money from the central bank.