China central bank vows to support virus-hit economy

Pan Gongsheng, Deputy Governor of People's Bank of China (PBC) and Director of the State Administration of Foreign Exchange. (AFP)
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Updated 08 February 2020

China central bank vows to support virus-hit economy

  • Analysts believe growth could decelerate sharply by 2 percentage points or more from 6 percent in the last quarter

BEIJING: China’s central bank will step up support for the economy to cushion the blow from a coronavirus outbreak, but activity is expected to recover once the virus is brought under control, one of its deputy governors said on Friday.

The People’s Bank of China (PBOC) is closely watching the impact of the outbreak on the world’s second-largest economy, and is preparing policy tools to offset pressure, Vice Governor Pan Gongsheng said on Friday.

“In terms of monetary policy, the next step is to strengthen counter-cyclical adjustments, maintain reasonable and ample liquidity and provide a sound monetary and financial environment for the real economy,” Pan said.

“In the context of the epidemic and the downward pressure on the economy, it is more important to maintain economic growth.”

Widespread travel and public health restrictions are taking a toll on tourism, restaurants and the service sector, while many factories have suspended operations as authorities try to contain the virus.

The death toll rose to 636 on, Thursday, with 31,161 cases confirmed.

Sources have told Reuters that Chinese policymakers are preparing measures, including more fiscal spending and interest rate cuts, amid expectations the outbreak will have a devastating impact on first-quarter growth.

Analysts believe growth could decelerate sharply by 2 percentage points or more from 6 percent in the last quarter, with business disruptions increasingly spilling over into the global economy. But they say business and consumer activity could rebound sharply if the outbreak peaks soon, much like the pattern during the SARS epidemic in 2003.

Pan reiterated that China had sufficient policy tools to cope with the pressure, such as using targeted reserve requirement cuts, relending and rediscount, to support key sectors.

Pan said the PBOC’s recent liquidity injections have helped lower market interest rates, which could affect China’s key lending rate — the loan prime rate (LPR), when it is next set on Feb. 20.

Pan said the cost of special relending, at 300 billion yuan, from the PBOC to commercial banks is relatively low. The PBOC also has told banks to cap rates on loans for selected firms at 3.15 percent, 1 percentage point lower than the latest LPR.

The PBOC injected 1.7 trillion yuan ($242.74 billion) via reverse repos earlier this week to shore up confidence and cut some key money market interest rates.

The government will also cut taxes and fees, Vice Finance Ministry Weiping said at the briefing.

Weighed down by weak demand at home and abroad and the Sino-US trade war, China’s economic growth had already slowed to 6.1 percent in 2019, the weakest in nearly three decades.

The ruling Communist Party needs growth of about 5.6 percent this year to fulfil its goal of doubling GDP and incomes in the decade to 2020.

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

Updated 24 January 2021

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

Oil prices have been stable since early January, with Brent crude price hovering around $55. Brent crude closed the week slightly higher at $55.41 per barrel,
while West Texas Intermediate (WTI) closed slightly lower at $52.27 per barrel.

Oil price movement since early January in a narrow range above $50 is healthy, despite pessimism over an increase in oil demand, while expectations of US President Joe Biden taking steps to revive energy demand growth are
still doubtful. The US Energy Information Administration (EIA) reported a hike in US refining utilization to its highest since March 2020, at 82.5 percent. The EIA reported a surprise weekly surge in US commercial crude stocks by 4.4
million barrels. Oil prices remained steady despite the bearish messages sent from the International Energy Agency (IEA), which believes it will take more time for oil demand to recover fully as renewed lockdowns in several countries weighed on oil demand recovery.

The IEA’s January Oil Market Report came as the most pessimistic monthly report among other market bulletins from the Organization of the Petroleum Exporting Countries (OPEC) and EIA. It forecast oil demand will bounce back to 96.6 million bpd this year, an increase of 5.5 million bpd over 2020 levels.

Though the IEA has lowered its forecast for global oil demand in 2021 due to lockdowns and vaccination challenges, it still expects a sharp rebound in oil consumption in the second half of 2021,
and the continuation of global inventory depletion.

The IEA reported global oil stocks fell by 2.58 million bpd in the fourth quarter of 2020 after preliminary data showed hefty drawdowns toward the end of the year. The IEA reported OECD industry stocks fell for a fourth consecutive month at 166.7
million barrels above the last five-year average. It forecast that global refinery throughput is expected to rebound by 4.5 million bpd in 2021, after a 7.3 million bpd drop in 2020.

The IEA monthly report has led to some short term concern about weakness in the physical crude spot market, and the IEA has acknowledged OPEC’s firm role in stabilizing the market.

Controversially, the IEA believes that a big chunk of shale oil production is profitable at current prices, and hence insinuated that shale oil might threaten OPEC market share.

It also believes that US shale oil producers have quickly responded to oil price gains, winning market share over OPEC producers. However, even if US shale oil drillers added more oil rigs for almost three months in a row, the number of operating rigs is still less than half that of a year ago, at 289 rigs.

The latest figures from the Commodity Futures Trading Commission show that crude futures “long positions” on the New York Mercantile Exchange are at 668,078 contracts, down by 18,414 contracts from the previous week (at 1,000 barrels for each contract).