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Economy

China cuts lending rate to help coronavirus-hit economy

Central bank's first reduction in 3 months aims to support small companies

China's central bank aims to support small and medium-sized companies affected by the coronavirus with its rate cut.

BEIJING -- The People's Bank of China lowered the benchmark lending rate for February, the central bank announced Thursday, in a sign to support small and mid-sized enterprises which are severely hit by the outbreak of the new coronavirus.

The one-year loan prime rate (LPR) was cut by 0.1% to 4.05% from the previous monthly fixing. The LPR is a lending reference rate set monthly by 18 banks at which they lend to customers with good credit. It was first announced in August 2019, as a means to substitute the bank's base rate used for policy interest rate. The bank announces the LPR on the 20th of every month.

The last rate cut was in November 2019, which marked a smaller decrease of 0.05%. The aim this time is to support the cash flows of small and medium companies, as the end of the coronavirus is still unclear, while retail, food-service, tourism and leisure sectors are confronting massive reduction in their sales.

Such companies may lack in cash reserves. The PBoC seeks to lighten their burden of repayment through the rate cut.

The PBoC instructs banks to decide their interest rate for corporate financing based on the LPR. As the lending rate is fixed by adding credit risks of individual companies on top of the LPR, the interest rate for small and mid-sized companies is likely to be lowered by cutting the LPR.

Meanwhile, the five-year LPR, which guides housing loans, was lowered by 0.05% to 4.75%. The last rate cut was also in November. The central bank seems to help increasing households who have difficulties in repayment as they see their wages being cut due to the epidemic.

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