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China cuts reverse repo rate by 20 basis points to facilitate lending

Updated: Mar 31, 2020 Xinhua Print

China's central bank on March 30 pumped liquidity into the market through seven-day reverse repos while cutting the interest rate by 20 basis points to lower lending costs and offset the economic shock of the novel coronavirus disease (COVID-19) outbreak.

The People's Bank of China (PBOC) injected 50 billion yuan (about $7 billion) into the market through the seven-day reverse repos at an interest rate of 2.2 percent, the central bank said in a statement on its website.

Before the move March 30, the PBOC has skipped reverse repos for 29 straight trading days

A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future.

Ma Jun, a member of the monetary policy committee of the PBOC, said the reverse repo rate cut indicates that the central bank has strengthened counter-cyclical adjustments in face of production resumption at home and a worsening external economic environment.

Cutting the reverse repo rate would help lower lending costs for the real economy, said Ma, who believes that adjustments in monetary market rates are now better reflected on market lending rates thanks to the reform of loan prime rate (LPR).

Wen Bin, a chief researcher with China Minsheng Bank, said the 50 billion-yuan reverse repos would help meet short-term market liquidity demand.

Meanwhile, the rate cut has echoed arrangements at a meeting of the Political Bureau of the Communist Party of China Central Committee last week that the prudent monetary policy should be pursued with more moderate flexibility, Wen said.

The PBOC also pledged on March 27  after a regular meeting of its monetary policy committee to improve its macroeconomic control to limit the fallout of the COVID-19 outbreak and better shore up its economy.

Aside from rate cut on March 31, China still has ample monetary policy space and tools at disposal, Ma said, noting that China remains the only major economy that keeps a normal monetary policy and is able to enhance counter-cyclical adjustments with regular operations.

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