People’s Bank of China lowered its base interest rate for the second time this year

The People’s Bank of China has lowered its interest rate to reduce the credit costs of companies and to support the coronavirus-stricken economy after contracting for the first time in three decades.

The Bank reduced its base interest rate on one-year loans by 20 basis points to 3.85% from 4.05% so far, and the interest rate on five-year loans has been reduced by 10 basis points to 4.65% compared to 4.75% so far.

This is the second reduction in the reference credit rate this year and another decline in some of China’s key interest rates. Most new and outstanding loans are based on the basic one-year interest rate, while the five-year rate affects the pricing of home loans.

China’s economy contracted 6.8% YoY in the first quarter of this year as the virus and stringent isolation measures shut down factories and shopping centers and left millions of people unemployed. This was the first decline since at least 1992 when quarterly statistics were kept.

Although the country is restarting its economic engines, analysts say it may take months to return activity to pre-crisis levels, and the likelihood of a global recession is mounting pressure.

The People’s Bank of China stepped up its policy of relief following the pandemic expansion in mid-January, and the government announced a number of fiscal measures ranging from cheap loans to tax credits and special bonds to finance infrastructure projects.

But the bank’s response to the crisis has so far not been as aggressive compared to other central banks in the world and is more limited than the massive stimulus provided during the global financial crisis.

Analysts believe that more aggressive incentives are unlikely at this stage because of worrying heads of state about rapid debt growth and the risks to the financial system.

Meanwhile, figures released today showed that China’s fiscal revenue fell 26.1% year-on-year in March, continuing its decline from the previous month.

The big bump in revenue is expected to increase the government’s reliance on loans to finance the stimulus that will be needed to restore economic growth.

Fiscal revenues fell by 14.3% in the first quarter compared to the same period last year to 4,598 trillion CNY (649.75 billion USD), said Treasury spokesman, referring to the decline in the coronavirus pandemic and the proposed tax breaks. He expects revenue to decline in the second quarter as well.

Some local authorities are failing to maintain basic activities and pay salaries, though efforts by the central government to increase payments to the regions may alleviate some of the pressure, say finance ministry officials.

Fiscal expenditures for the January-March period fell 5.7% YoY to 5.528 trillion CNY.

Tax revenues shrunk 16.4% YoY in the quarter to March, while non-tax revenues grew by a modest 0.1%. VAT revenues decreased by 23.6%, consumer tax by 16.4% and corporate tax by 12.8%.

Treasury officials said China is exploring plans to allow the deficit to widen as a ratio to GDP in the annual budget, without disclosing details.

Last month, the ruling Communist Party’s Politburo announced it was considering widening its budget deficit and issuing more special bonds.