Key question asked over financial firepower
Nation well placed to play crucial role when health crisis ends
Can China lift the world economy out of recession once the COVID-19 pandemic is over?
After the global financial crisis in 2008, the Chinese government put in place the biggest financial stimulus package in economic history.
The 4 trillion yuan ($565.6 billion) injection cushioned the Chinese economy from a sudden loss of export demand and led to it generating up to a quarter of global GDP growth for more than a decade.
With many Western countries mired in debt, with little fiscal headroom and no scope to maneuver monetary policy－and with interest rates already at record lows as the novel coronavirus pandemic is tackled－is it possible the world’s second-largest economy could make a similar move this time?
Liu Guoqiang, vice-governor of the People’s Bank of China, the nation’s central bank, said on April 3 that China had “abundant tools and ample policy space” to stimulate the domestic economy, whose GDP contracted by 6.8 percent year-on-year in the first quarter, according to the National Bureau of Statistics.
So far, the central bank is keeping its powder dry, with the main policy interest rate, the one-year loan prime rate, remaining at 4.05 percent on March 20.
Instead, the central bank has cut the reserve requirement ratio－the percentage banks must hold in reserve with it－enabling the bank to increase lending to businesses. The latest cut of 50 basis points is to be followed by another 50-point reduction on May 15, releasing 400 billion yuan into the financial system.