People's Bank of China (PBoC) cut its one-year rate prime rate to 3.85 percent from initially 4.05 percent as the country’ economy contracted for the first time in four decades - Photo by Livemint

JAKARTA (TheInsiderStories) – China decided to lowered its loan prime rate (LPR) after the People’s Bank of China (PBoC) governor Yi Gang said the central bank would step up credit support and lower real lending rates to support to real economy. On Monday, PBoC has cut its 7 Days Repo Rate five basis points to 2.5 percent.

Based on the official statement released on Nov. 20, the one-year LPR fell five basis points to 4.15 percent from 4.20 percent in October and the five-year LPR was lowered by the same margin to 4.80 percent from 4.85 percent. The governor said, China will continue to implement a prudent monetary policy and see banks contribute more to financing the real economy.

On Monday, PBoC has cut the 7-days reverse repo rate by 25 basis points to 2.5 percent for the first time since Oct, 2015, said the central bank today (11/18). The decision has been take to relax the liquidity, as well as a signal to the market that policy makers are ready to support slowing growth.

In addition to liquidity instruments, the Bank also injected $26 billion into the financial system through open market operations to help alleviate liquidity concerns. This policy was followed by a decline in the yield of the 10-year government debt by 4 basis points to 3.2 percent, the lowest level in a month.

The adjustment from the PBoC signals the continuation of the stimulus policies adopted by policymakers, even amid increasing evidence that economic growth will drop below 6 percent next year. On the latest report, the central bank warned about risks of economy growth and  rising inflation.

In response to this, Chinese central bank said will increase counter-cycle adjustments while avoiding the use of large stimulus policies. Efforts must be intensified to prevent the spread of inflation expectations.

The PBoC has refrained from aggressive easing amid accelerating inflation and worries about debt buildup. The higher-ups have promised to maintain prudent monetary policy while achieving the right balance between tightening and easing.

Previously, director-general of the monetary policy department, Ruan Jianhong, said since the beginning of 2019, in line with the arrangements of the Communist Party of China Central Committee and the State Council, the PBoC has stuck to a sound monetary policy.

Overall, he noted, the liquidity in the banking system is reasonably adequate, money, credit and aggregate financing to the real economy (AFRE) have seen moderate growth, and market interest rates have been in stable operation.

According to preliminary statistics, he explained, the AFRE growth in September was RMB2.27 trillion, expanding by RMB138.3 billion year on year. At end-September, outstanding AFRE reached RMB219.04 trillion, rising by 10.8 percent year on year, 0.2 percentage points higher than a year earlier, he adds.

Turning to foreign exchange reserves and the exchange rate, at end-September, China’ reserves stood at $3.09 trillion, and the US Dollar versus CNY exchange rate was 7.0729.

PoBC spokesperson Sun Guofeng revealed the PoBC was working hard to promote the use of LPR, and the proportion of LPR as the reference rate was gradually rising.

The central bank expect progressive development characterized by,”385”, which means for large banks, the proportion of new loans using LPR as the reference rateshould reach 30 percent in third quarter, 50 percent by the fourth quarter, and over 80 percent by the first quarter of 2020.

Guofeng added, the LPR announced on August 20 and September 20 stepped down slightly. According to him, the reform has proved to be effective. He noted, “We will make greater headway in this regard in the future.” .

Since early 2019, PBoC injected the largest amount of money RMB560 billion ($82.84 billion) to stimulate the slowdown economy. Recently the country’ economy moved lackadaisically, impacted by its trade war with the United States.

PBoC stated, that the injection of funds was done to maintain adequate bank liquidity and anticipating the high funding needs during the peak tax payment season.

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