Equity investors’ confidence in the central bank continues as China’s CSI300 index rose more than 1% on Sunday. After hitting a low of 3,639 on February 3, it rose 10.9%, almost making up for the decline since the Lunar New Year. The People’s Bank of China, which cut the reverse RP rate last time, cut the interest rate for medium-term loans to financial institutions from 3.25% to 3.15%. In addition, the People’s Bank of China announced that it would inject 100 billion yuan of reverse RP into financial institutions. Following these measures, at the end of this week, it is highly likely that the base rate will be cut to alleviate the blow of the novel coronavirus.
With fiscal policy likely to play an important role in the current situation of concerns over the impact of the novel coronavirus, the Chinese government has promised to cut corporate tax. However, whether these measures will lead to an increase in production rates and a normalization of the business cycle will still depend on how quickly the novel coronavirus subsides.
At present, monetary stimulus does not do much to increase investment or consumption spending, but only causes asset price bubbles. At this stage, lower cost of capital does not increase corporate capex, nor does consumer spending on housing, automobiles and other durable goods. The economy can only recover when the novel coronavirus subsides