JAKARTA (TheInsiderStories) – The People’s Bank of China (PBoC) surprisingly lowered the interest rates on reverse repo by 10 bps on Monday (02/03) as authorities stepped up efforts to support the economy suffering from the Wuhan coronavirus outbreak. The central bank said on its website that it slashed the seven-day reverse repo rate to 2.4 percent from 2.5 percent and the 14-day tenor to 2.55 percent from 2.65 percent.

On the same day, the PBoC also pledged to inject a total of 1.2 trillion yuan (US$174 billion) into money markets through reverse bond repurchase agreements as the Shanghai Composite slumped 7.7 percent and the Shenzhen Component Index fell nearly 8.5 percent on their first day of trading after an extended Lunar New Year holiday.

“The liquidity of the overall banking system will be 900 billion yuan more than the same period of last year,” the central bank added.

Markets in China were closed from January 24th for the regular Lunar New Year Holiday but this year the government extended it by 3 days in an attempt to contain the spread of the virus. The losses on each index have wiped out a combined $445 billion in market value, AP reported.

The plunge delivered Shanghai its worst day since August 2015’s “Black Monday,” when global markets were rattled by China slowdown fears. Shenzhen, meanwhile, hasn’t recorded a single-day percentage drop this bad since 2007.

China’s currency also fell. The onshore yuan sank 1.6 percent, dropping below seven yuan to one US dollar on its first day back from the holiday break. The yuan also weakened below the seven marks offshore, where it moves more freely and has been trading since last week.

While global markets have had several days to weigh the rapid spread of the coronavirus, this is the first chance that mainland China has had to react in more than a week. Before the holiday, the number of cases numbered roughly 800 — now, there are more than 17,000.

Authorities knew Monday’s shock was likely inevitable. The central bank has said Sunday that it would inject liquidity into the Chinese markets using the purchase of short-term bonds to shore up banks’ ability to lend money. The measure will help maintain “reasonably ample liquidity” in the banking system and keep currency markets stable, the bank said.

The net amount of liquidity being injected into the markets is much lower. According to Reuters calculations using central bank data, more than 1 trillion yuan worth of other short-term bond agreements will mature Monday. That brings the net amount of cash flooding into the markets down to 150 billion yuan.

The central bank will also keep in contact with financial institutions and markets to determine what other policy responses may be necessary, according to Pan Gongsheng, deputy governor of the central bank.

Protecting China’s financial markets and the economy is a top priority for the government, which is also bracing for a potentially severe hit to first-quarter economic growth. Some economists have said that China’s growth rate could drop two percentage points this quarter — a decline that could mean $62 billion in lost growth.

Along with Monday’s liquidity kick, top financial and economic regulators have announced dozens of other measures to stabilize China. For example, the National Development and Reform Commission — the country’s top economic planning agency — said Monday the government would “go to all lengths” to make sure that people have what they need to live, including food and other necessities.

It also encouraged companies “that are key to control and prevent the virus” or are “of vital importance to the national economy” to resume production as soon as they can.

And the PBoC said Saturday that it would provide money at low-interest rates to commercial banks so that those banks could offer cheap loans to companies that make clinical masks, coronavirus testing kits and other types of medical supplies. The central government will also subsidize those special loans.

The country’s stock exchange regulators have also said they would allow companies to delay 2019 annual reports and 2020 quarterly earnings reports if they are affected by the disruption.


Written by Lexy Nantu, Email: lexy@theinsiderstories.com