China's Lowest Growth Rate Leads to Effective 0.2%p Cut in Benchmark LPR Rate (Comprehensive)

[Asia Economy Beijing=Special Correspondent Park Sun-mi] - China, which announced the worst-ever first-quarter economic growth rate of -6.8%, has effectively lowered the Loan Prime Rate (LPR), the benchmark interest rate. This is a swift economic stimulus measure in response to the severe impact of the novel coronavirus (COVID-19) pandemic on the economy.

The People's Bank of China lowered the 1-year LPR by 0.2 percentage points to 3.85% on the 20th. As the COVID-19 outbreak worsened this year, the central bank had already cut the LPR to 4.05% in February, and now it has lowered it again within two months. The 5-year LPR, which affects mortgage loans, was reduced by 0.1 percentage points from 4.75% to 4.65%.

The LPR has effectively served as the benchmark interest rate since August last year. On August 18, the People's Bank of China introduced the LPR based on the Medium-term Lending Facility (MLF) rate from 18 commercial banks and has been publishing the average rate on the 20th of each month. Since then, all financial institutions have used the LPR as the standard for loan interest rates. The official 1-year benchmark lending rate of the People's Bank of China remains frozen at 4.35% since October 2015.

This LPR cut is widely interpreted as a pre-announced measure. Chinese economic experts had expected the People's Bank of China to lower the LPR this month as the economic damage from COVID-19 became apparent. Most anticipated a 0.2 percentage point cut in the 1-year LPR.

With this move by the People's Bank of China, market funding costs are expected to decrease. The central bank had already supplied about 300 billion yuan in liquidity to the market on the 15th. Along with the reserve requirement ratio cut, the 1-year MLF loan rate for financial institutions was lowered from 3.15% to a record low of 2.95%, a 0.2 percentage point reduction.

The ongoing trend of interest rate cuts reflects China's recognition of its economic crisis. The first-quarter economic growth rate announced on the 17th was -6.8%. Economic activities halted due to COVID-19 prevention measures, resulting in the first negative growth rate since the quarterly growth rate statistics began in 1992. On an annual basis, this is the first time China’s economy has contracted since the end of the Cultural Revolution in 1976.

Chinese President Xi Jinping convened a meeting of the Communist Party Central Political Bureau immediately after the growth rate announcement, signaling a super-strong economic stimulus plan. At the meeting, President Xi stated, “The first quarter of this year was exceptional. The impact of COVID-19 has dealt an unprecedented shock to China’s economic and social development,” and “We must respond to the effects of COVID-19 with stronger macroeconomic policies. The fiscal deficit ratio to GDP should be expanded, and the issuance of special government bonds and local government special-purpose bonds should be increased. A moderate monetary policy should be operated more flexibly and adaptively. We should induce a reduction in loan market interest rates to ensure liquidity is supplied to the real economy, especially small and medium-sized enterprises.”

Accordingly, the government’s relaxed monetary policy and proactive fiscal policy are likely to continue for the time being.

Jacklyn Long, BNP Paribas’s Chief China Economist, said, “The monetary easing stance will continue for the time being,” adding, “Besides the LPR cut announced today, we expect a 0.5 percentage point cut in the bank reserve requirement ratio and an additional 0.1 percentage point cut in the LPR soon.” Li Anping, CEO of Zhixin Investment Research in China, explained, “Last year’s fiscal deficit target was 2.8% of GDP, but this year the fiscal deficit ratio will exceed a record high of 3.5%. Increasing the fiscal deficit ratio is essential to overcome the impact of COVID-19.”

This content was produced with the assistance of AI translation services.