(C) Reuters. Outbreak of the coronavirus disease (COVID-19), in Wuhan
BEIJING (Reuters) – China has ample policy tools to support the virus-hit economy, but it will tread warily in cutting the benchmark deposit rate due to elevated inflation and the potential impact on ordinary savers, Liu Guoqiang, a vice central bank governor, said on Friday.
Chinese policymakers have signalled additional monetary and fiscal stimulus to cushion the blow to the economy, as the spreading coronavirus outbreak raises fears of a global recession and rattles financial markets.
“The Chinese economy will continue to show extreme resilience,” Liu told reporters at a briefing.
“In addition, we have abundant tools and ample policy space to stabilize economic growth. I think the impact of the epidemic on China’s economy is temporary,” he said.
He said China’s first-quarter economic data would definitely not look good compared to pre-epidemic levels, but the impact could be temporary, pointing to a clear improvement in March data from February.
Liu said cutting the benchmark deposit rate to drive lending costs lower needed careful consideration given elevated consumer inflation, currently running at 5.3% annually in the January-February period, and resulting pressures on the yuan currency to depreciate further.
“The interest rate of deposits is more directly related to ordinary people. If you let it become negative, then you must fully evaluate and consider the feelings of ordinary people,” he said.
The benchmark one-year deposit rate is currently 1.5%.
On Friday, China’s central bank set its daily midpoint for the yuan at 7.1104 per dollar, the weakest level since the 2008 global financial crisis.
“We will never let the market suffer a ‘credit crunch’, and of course, credit should not be overflowing, too,” Liu said, adding that the growth of M2 money supply and total social financing could be slightly higher than nominal GDP growth.
The central bank has already rolled out a raft of measures, including cutting lending rates and banks’ reserve ratios, and doling out cheap loans for selected firms, to cushion the blow to the economy from the coronavirus outbreak.
Last week, the ruling Communist Party’s Politburo called for expanding the budget deficit, issuing more bonds, guiding interest rates lower, delaying loan repayments, reducing supply-chain bottlenecks and boosting consumption.
Vice Finance Minister Xu Hongcai told the same briefing that the Chinese government’s debt risk remains controllable, as the overall debt ratio was at 38.5% at the end of 2019 – which is relatively low by international standards.
Rising the annual budget deficit ratio and issuing special treasury bonds, which would be the first such move since 2007, would need approval from parliament, Xu added.
China will also support local governments in injecting capital into small Chinese banks, as the risk of a global recession rises, a senior official from the country’s banking and insurance regulator said at the same briefing.
Foreign and private firms are welcome to participate in the restructuring of China’s small banks, said Zhou Liang, vice head of the China Banking and Insurance Regulatory Commission (CBIRC).
Chinese banks gave new loans of nearly 7 trillion yuan ($989 billion) in the first quarter, Zhou said.
China says has ample policy tools to cope with coronavirus impact