China Promises Cash and Support to Calm Financial Markets

China unveiled a raft of measures over the weekend to aid companies hit by the coronavirus outbreak and also shore up financial markets, which are bracing for a sell-off when trading re-starts on Monday.

The central bank will supply cash to money markets and banks were told to lend more and not call in loans to companies in Hubei and other affected regions. In addition, night trading sessions for futures were suspended, some share pledge contracts can be extended, and there was a relaxation of asset-management rules, which were forcing banks to remove implicit guarantees for trillions of dollars of investments.

The measures announced over the weekend were mostly targeted at the immediate problems facing the economy and markets and aren’t a large increase in stimulus, although that could change if the situation warrants. The viral epidemic has killed hundreds and sickened thousands and will also have a substantial economic impact, with a large part of the nation’s economy shut down at least through the end of this week in an attempt to stem the spread.

Policy makers will likely “focus on ensuring financial resources flow to the places needed for the ‘firefighting’ and keeping the broad policy environment supportive” during the early stage when immediate virus control is the priority, Goldman Sachs Group Inc. economists including Andrew Tilton wrote in a Friday report to clients. “Once the epidemic is brought under control, senior policy makers will likely shift their focus to the economy” to boost infrastructure and consumption, with the size of that dependent on the severity of the outbreak, they wrote.

Main Policy Announcements

The People’s Bank of China will add a net 150 billion yuan ($21.7 billion) to money markets on Monday, according to Bloomberg calculations based on a statement on Sunday. The money will be supplied using reverse repurchase agreements to ensure liquidity is “reasonably ample” during the outbreak, according to the PBOC.

The total injection announced was 1.2 trillion yuan, the largest single-day addition of its kind in data going back to 2004. However, the net effect is much lower as there are more than 1 trillion yuan of short-term funds scheduled to mature on Monday.

“The amount of the net injection isn’t huge. The PBOC may want to retain some flexibility, which means it can add more liquidity in the rest of the week if the sentiment is too bad,” according to Tommy Xie, an economist at Oversea-Chinese Banking Corp.

Other Measures

That Sunday promise of cash followed a joint statement by the central bank, ministries and financial regulators on Saturday, promising to use open market operations, the standing lending facility and other tools to ensure interbank liquidity is sufficient to keep money market rates stable.

The securities regulator said Sunday that it would halt night sessions for futures trading from Monday until further notice, and allow some share pledge contracts to be extended by as long as six months as part of measures to improve market expectations and prevent irrational behavior.

That follows the announcement by the banking regulator a day earlier that it will “suitably extend the grace period” for firms that have difficulty meeting the end-2020 deadline to comply with new asset management rules. For insurers with ample solvency, the regulator will allow them to “appropriately raise their investment” in equities from the current limit of 30% of assets.

What Bloomberg’s Economists Say:

The focus of this initial show of force is on providing economy-wide liquidity, ensuring regular functioning of the financial system and essential financial services, and targeted measures for the most affected regions and sectors. We think the focus will shift to more growth support once there are signs that the virus is starting to be contained -- with deeper reductions in interest rates and the reserve requirement ratio, together with fiscal measures.