China’s Lenders Cut Prime Rate To Boost Sick Economy

Chinese lenders have cut their prime lending rate to try and prop up their country’s economy, which has been ravaged by the coronavirus, according to the Financial Times on Thursday (Feb. 20).

S&P had previously warned China that it would face a surge of bad loans numbering up to $1.1 trillion as a fallout from the effects of COVID-19.

So, on Thursday, major Chinese lenders reduced their one-year loan prime rate, a key number used across the Chinese financial system, by 0.1 percentage points, to 4.05 percent.

The reduction was expected following the country’s central bank’s lowering of its medium-term lending rate earlier this week. The move is expected to alleviate lending conditions and marks the latest attempt to stimulate the country’s disrupted economy.

The coronavirus has done a number on the economies of China and several surrounding nations as manufacturing, supply chains and tourism have been affected by both illnesses and the quarantines of people who might be sick.

S&P also forecast that China’s annual economic rate could fall as low as 4.4 percent if the coronavirus outbreak doesn’t fade by April.

The most likely scenario is that the virus will peak by March, and in that situation, S&P said growth could rise by 5 percent over the course of 2020. But that figure would still be a decline from the 6.1 percent growth last year, already a weak figure for one of the world’s second-biggest economy in the last 20 years.

The worst-case scenario is a “growth shock” that will spark a Rmb7.7 trillion surge in the banking sector’s bad loans to Rmb1.1 trillion. That would occur as some individuals and businesses struggle to pay their debts.

However, even in the most likely scenario, the S&P forecast a leap in non-performing loans between 5.4 trillion and 7.8 trillion, which would represent 6 percent of the banks’ total loans.

Kenneth Ho, head of Asia strategy at Goldman Sachs, told the Financial Times the test for China would be whether there will be rising credit stresses and more bond defaults in the near term.