SCIO briefing on fiscal policies to control the novel coronavirus pneumonia (NCP) outbreak

A press conference was held Friday morning on China’s fiscal policies to support the prevention and control of the novel coronavirus-related pneumonia outbreak and alleviate the difficulties of small and micro enterprises in accessing affordable financing. February 8, 2020

Market News International:

I have a question for Mr. Pan. Earlier this week, China's central bank injected liquidity into the market and adjusted the interest rate, and we saw a marked decline in inter-bank interest rates. Can you please explain to us the actual situation behind the decline in the interest rates of loans? In the near future, will the central bank continue lowering the medium-term lending facility (MLF) interest rate and accelerate the declining trend in lending rates? With what intensity and pace will banks continue to increase financing to stabilize the market and expectations in the later period?

Pan Gongsheng:

First, on Jan. 1, we announced to cut the reserve requirement ratio (RRR) by 50 basis points , releasing around 800 billion yuan ($114.6 billion) of long-term funds. The financial markets re-opened after the Spring Festival holiday, and on Feb. 3 and 4 the People's Bank of China pumped a total of 1.7 trillion yuan via reverse repos to inject funds into the market. These measures show the central bank's strong determination in stabilizing market expectations and boosting market confidence. In terms of the current market operations, the bid-winning rates of seven-day and 14-day reverse repos were 2.4 percent and 2.55 percent respectively, both down by 10 basis points. In the context of the increasing volume of funds and declining price, the interest rate of the entire financial market is also falling. On Feb. 6, the overnight repo rate and seven-day repo rate were around 1.8 percent and 2.3 percent respectively, fairly stable.

We all know that the loan prime rate (LPR) is the optimal quoted interest rate for loans, which is formed on the basis of the quote prices by 18 banks. Changes in the interest rates across the whole market will be reflected in the loan rate. Interest rate changes in the financial and money markets will also affect LPR expectations. The expected MLF interest rate next time and the LPR to be released on Feb. 20 will quite probably show a downward trend. The LPR adjustment will have strong influence and guidance on the pricing of commercial bank loans, because the banks' lending rates are formed by adding or subtracting basis points based on it., and when banks lend money, they adjust the range of points according to the interest rate changes in the market. 

As to the next steps, the People's Bank of China is analyzing and assessing the epidemic's impact on the economy in accordance with the requirements of the State Council. China still has enough room to adjust its macroeconomic policies, and it is also one of the few major economies maintaining normal monetary policies. Therefore, what we have in our toolkit is sufficient. 

In terms of monetary policy, the next step is to increase the intensity of counter-cyclical adjustments, maintain reasonable and sufficient liquidity, and create a much better financial environment for the real economy. The second is to further market-oriented interest rate reform and improve the market quotation interest rate mechanism, which is the LPR transmission mechanism I mentioned just now. This will then improve the transmission efficiency of monetary policy and lower the social financing costs. Thirdly, we will keep using structural monetary policy tools such as targeted reductions in reserve requirement ratio of banks, relending, and re-discounts, and give more support to the key areas and weak links in our national economy. Thank you.

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