China bank overhaul frees up $56bn for virus-hit economy

Economists are forecasting a steep contraction in China’s first quarter gross domestic product. (AFP)
Short Url
Updated 04 April 2020

China bank overhaul frees up $56bn for virus-hit economy

  • Beijing cuts small and mid-sized banks’ reserves, releasing billions to support jobs and struggling businesses

BEIJING: China’s central bank said on Friday it was cutting the amount of cash that small and mid-sized banks must hold as reserves, releasing around 400 billion yuan ($56.38 billion) in liquidity to shore up the economy, which has been badly jolted by the coronavirus crisis.

The latest stimulus move comes as the world’s second-largest economy looks likely to shrink for the first time in 30 years and hopes for a quick recovery are being soured by the rapid spread of the disease worldwide, crushing global demand.

The People’s Bank of China said on its website it will cut the reserve requirement ratio (RRR) for those banks by 100 basis points (bps) in two equal steps, the first effective as of April 15 and the second as of May 15.

China has about 4,000 small and mid-sized banks. The latest cuts would lower their RRR to 6 percent.

In addition, the interest rates on financial institutions’ excess reserves with the central bank would be reduced to 0.35 percent from 0.72 percent, effective April 7, the PBOC said.

HIGHLIGHTS

● RRR cut by 100 bps for mid-sized, small banks.

● Frees up $56bn in cash to spur lending.

● Cuts rate on excess reserves for banks.

The RRR cut was flagged by the Cabinet on Tuesday along with other support measures as Beijing tries to cushion the economic blow from the pandemic, which is fanning worries about heavy job losses.

While most of the country’s factories are believed to be up and running again, though not at normal levels, a private survey earlier on Friday suggested services companies are still struggling to get back on their feet and cut jobs in March at the fastest pace since at least 2005.

Many are small, privately owned firms with less cash to see them through a prolonged downturn than large, state-owned enterprises.

The export sector is also facing a fresh shock, as the swift spread of the virus around the world prompts many countries to impose draconian containment measures similar to those used in China. Nomura estimates China could lose 18 million export-related jobs in the next one to two quarters as shipments contract 30 percent.

The latest RRR cut would be the third so far this year and the 10th since early 2018, when the economy was starting to slow under the weight of intensifying US-China trade frictions.

The central bank has been easing monetary policy since the virus outbreak escalated in January, cutting the benchmark lending rate and telling banks to offer cheap loans and payment relief to firms that have been hardest hit by the outbreak and anti-virus measures.

While demand for credit is believed to be falling in many countries as the disease takes a heavy toll on businesses, China still has strong control over its banking system.

Chinese banks issued new loans worth 7 trillion yuan ($989 billion) in the first quarter, said Zhou Liang, vice head of the China Banking and Insurance Regulatory Commission (CBIRC) earlier in the day.

The move to slash the interest rates on excess reserves for banks is aimed at boosting the efficiency for banks to use the funds and better serving small and micro-firms, said the PBOC.

The rate cut on excess reserves indicates that the PBOC is very keen to lower the credit costs for companies, said Commerzbank economist Hao Zhou. PBOC last reduced the rates to 0.72 percent from 0.99 percent during the global financial crisis in 2008.

“The rates for excess reserves are also seen as the floor of the ‘rates corridor’ in China. In this sense, today’s cut has opened a big door for further cut to MLF, which is the ceiling of the corridor.”

After widespread factory closures and travel restrictions imposed by Beijing to contain the spread of the coronavirus that has killed more than 3,300 in the country, businesses in the country have reopened and life for millions of people has started to slowly return to normal.

But economists are forecasting a steep contraction in China’s first quarter gross domestic product, with some expecting a year-year slump of 9 percent or more — the first such contraction in at least three decades.

Policy sources told Reuters that Chinese government could expand 2020 budget deficit to a record high and was considering lowering its economic growth target for 2020 given the prolonged impact of the pandemic. But one central bank adviser has suggested that a growth target not even be set this year due to all the uncertainty. 


EU pledges to stay green in virus recovery

Updated 29 May 2020

EU pledges to stay green in virus recovery

  • To help economies from the 27-nation bloc bounce back as quick as possible

BRUSSELS: The European Commission pledged on Thursday to stay away from fossil-fueled projects in its coronavirus recovery strategy, and to stick to its target of making Europe the first climate neutral continent by the middle of the century, but environmental groups said they were unimpressed.

To weather the deep recession triggered by the pandemic, Commission President Ursula von der Leyen has proposed a €1.85 trillion ($2 trillion) package consisting of a revised long-term budget and a recovery fund, with 25 percent of the funding set aside for climate action.

To help economies from the 27-nation bloc bounce back as quick as possible, the EU’s executive arm wants to increase a €7.5-billion ($8.25 billion) fund presented earlier this year that was part of an investment plan aiming at making the continent more environmentally friendly.

Under the commission’s new plan, which requires the approval of member states, the mechanism will be expanded to €40 billion ($44 billion) and is expected to generate another €150 billion in public and private investment. The money is designed to help coal-dependent countries weather the costs of moving away from fossil fuels.

Environmental group WWF acknowledged the commission’s efforts but expressed fears the money could go to “harmful activities such as fossil fuels or building new airports and motorways.”

“It can’t be used to move from coal to coal,” Frans Timmermans, the commission executive vice president in charge the European Green Deal, responded on Thursday. “It is unthinkable that support will be given to go from coal to coal. That is how we are going to approach the issue. That’s the only way you can ensure you actually do not harm.”

Timmermans conceded, however, that projects involving fossil fuels could sometimes be necessary, especially the use of natural gas to help move away from coal.

The commission also wants to dedicate an extra €15 billion ($16.5 billion) to an agricultural fund supporting rural areas in their transition toward a greener model.

Von der Leyen, who took office last year, has made the fight against climate change the priority of her term. Timmermans insisted that her goal to make Europe the world’s first carbon-neutral continent by 2050 remained unchanged, confirming that upgraded targets for the 2030 horizon would be presented by September.

Reacting to the executive arm’s recovery plans, Greenpeace lashed out at a project it described as “contradictory at best and damaging at worst,” accusing the commission of sticking to a growth-driven mentality detrimental to the environment.

“The plan includes several eye-catching green `options,’ including home renovation schemes, taxes on single-use plastic waste and the revenues of digital giants like Google and Facebook. But it does not solve the problem of existing support for gas, oil, coal, and industrial farming — some of the main drivers of a mounting climate and environmental emergency,” Greenpeace said.

“The plan also fails to set strict social or green conditions on access to funding for polluters like airlines or carmakers.”

Timmermans said the EU would keep investing in the development of emission-free public transportation, and promoting clean private transport through the EU budget.