China cut its benchmark lending rate on February 20, aiming to stimulate production and mitigate the impact of the outbreak of the coronavirus on some fragile sectors. Experts have suggested that increased supply of cheaper credit will help reverse the economic slowdown. Following the announcement, on February 21 steel and iron ore futures in China have posted an increase.
The People's Bank of China, the country’s central bank, cut the benchmark lending rate, the one-year loan prime rate (LPR), by 0.1 percentage point to 4.05 percent. The rate cut is the largest since the LPR was introduced in August 2019, and constitutes a measure to lower financing costs for enterprises during the struggle against the virus. The LPR is the interest rate that banks charge their most creditworthy clients. The cut in the one-year LPR was in line with market expectations. The five-year LPR, which is a reference point for the nation's mortgage loans, was reduced by 0.05 percentage points to 4.75 percent, from the previous 4.8 percent.
The different cuts made to the one-year LPR and five-year LPR indicate that China’s move aims to lower the financing costs for the overall economy excluding real sector, while the lower decline in the five-year LPR shows that the policy to curb overheating of the real estate market has not been loosened.
Rebar futures at Shanghai Future Exchange went up by RMB 45/mt ($6.4/mt) or 1.3 percent to RMB 3,485/mt ($498/mt) on Friday, February 21, while iron ore futures at Dalian Commodity Exchange added RMB 18.5/mt ($2.6/mt) or 2.8 percent to RMB 675.5/mt ($96.5/mt) on the same day.