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With the International Monetary Fund predicting on Tuesday the worst global downturn since the 1930s, China has deployed an additional policy response to address the slowdown caused by the novel coronavirus pandemic and facilitate economic recovery through incentivizing bank lending and stabilizing corporate hiring.
A few hours after the IMF revised its projection on China's economic growth outlook — to 1.2 percent GDP growth this year, before a strong rebound up to 9.2 percent in 2021 — the nation's central bank cut a key lending rate to a record low and injected large amounts of liquidity into the financial sector on Wednesday.
The IMF said the global economy is projected to contract by 3 percent this year, and the COVID-19 pandemic would send global growth into its deepest recession since the Great Depression in the 1930s.
"The Great Lockdown", as the IMF called the economic downturn, could weaken global demand and depress exports, adding risks to otherwise recovering Chinese business activities. It will require stronger monetary and fiscal action to minimize persistent problems that could emerge from subdued investment and job losses in this severe downturn, economists said.
Blunting the impact of the severe shock will require a surge of government debt, which is the key funding source of fiscal stimulus, and an optimized debt management system should be put in place to prevent potential financial risks during the recovery phase, said Li Yang, director of the Chinese Academy of Social Sciences' National Institution for Finance and Development.
"Interest rates should be cut quickly, with an increase of money and credit supply. As central banks worldwide are taking aggressive monetary easing, there is no need for China to hold still," Li said.
China's central bank, the People's Bank of China, cut the one-year medium-term lending facility rate — a base to determine the new lending benchmark called the loan prime rate, by 0.2 percentage point to 2.95 percent. The drop was the largest within four years, and the new MLF rate hit the lowest level since its introduction in 2014.
Financial analysts expect a lower loan prime rate, down by the same degree, to be reported on Monday, to further ease lending costs of corporate borrowers, especially to support smaller businesses under pressure.
The PBOC injected 100 billion yuan ($14.16 billion) of liquidity through the MLF and released about 200 billion yuan in long-term funds into the interbank market through the targeted cut of some small and medium-sized depositary institutions' reserve requirement ratios on Wednesday.
New financial relief measures were put in place before China reports its major economic indicators, set for Friday. Economists predicted a sharp slowdown in the first quarter caused by the coronavirus-induced lockdown.
Zhang Ming, an economist at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, said expansionary fiscal policy should take the leading role in the recovery process and support funding for corporations and households. Measures include tax relief, direct subsidies, coupons that can be traded for consumer goods and cash payments to individuals, he said.
The fiscal actions should first keep small and medium-sized companies from bankruptcy and subsidize the unemployed, then strengthen infrastructure investment, Zhang said.
Robin Xing, chief China economist at Morgan Stanley, said Beijing could soon approve special central government bonds and raise local governments' special bond front-loading quota to support growth. He estimated the total amount of government bond financing could be 4.3 trillion yuan higher than last year.
Foreign Ministry spokesman Zhao Lijian said at a news conference on Wednesday that major economies should take necessary monetary, fiscal and structural policies to stabilize market expectations and improve economic resilience. He called for elimination of trade restrictions such as tariff hikes.
On Tuesday, the IMF updated its Global Financial Stability Report, which said financial conditions in China have been broadly stable, in contrast with other countries. This may have reflected early, proactive efforts that helped stabilize market conditions and sentiment, the report said.
"The large, timely and targeted fiscal, monetary and financial policies already taken by many policymakers — including credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits and tax relief — have been lifelines to households and businesses, and this support should continue," said Gita Gopinath, the IMF's chief economist.
