PBOC cut the 1-year loan prime rate (LPR), by -20 bps, to 3.85% today. The move has been widely anticipated as the central bank lowered the 1-year MLF rate by the same size last week. LPR is the best lending rate offered by commercial banks, while the MLF rate is the interest rates offer by the central bank when it lends money to financial institutions. Therefore, the latter serves as the guidance for the former. The CCP politburo meeting held last Friday warned of the exceptional uncertainty of the economic outlook. The policy focus lies on monetary stimulus while, there was limited discussion about the fiscal policy. We expect to see more reduction in the policy rate and RRR in coming months.
The CCP politburo meeting stressed the priority of achieving the “six stabilities”: stable employment, trade, financial markets, investment, foreign capital, and expectations. Shy of announcing the GDP growth for this year, the government only pledged to “closely follow the goal of achieving a moderately prosperous society”. Earlier this year, the members signaled an annual target of “around 6%”. Such hopes have be evaporated by the coronavirus outbreak, originated in Wuhan China and spread to all over the world. The economy contracted -6.8% y/y in 1Q20. From a month ago, the decline was -9.8%. IMF’s latest projections suggest that China’s GDP could expand by +3% this year. Yet, we believe all depend on the developments of the coronavirus pandemic worldwide. China’s economic downturn is not only affected by supply chain disruption but also global demand.
The government reiterated the approach of prudent but more flexible monetary policy. PBOC has been adopting easing measures over the past month. Besides, cutting LPR and MLF, it lowered the rate on 7-day reverse repo on March 29. Moreover, it lowered interest rate on excess reserves to 0.35% from 0.72%, effective April 7. The last rate cut on excess reserves was in 2008, from 0.99% to 0.72%. Earlier in March, PBOC already announced RRR cut on qualified city banks, rural banks and other rural financial institutions by 100 bps, effective on April 15 and May 15 (50 bps each) to release around Rmb 400B liquidity. We expect to see more easing in coming months.
The politburo meeting also called called for a proactive fiscal policy. However, the details are lacking. There is not much information about the size and time of issuance of the special national bond, not called the antivirus special bond.