context: The State Council has been flashing warning signs over the economy since November and the PBoC responded in December. On 6 December the central bank cut the reserve requirement rate. The messaging from the Politburo meeting on the economy suggests economic stability will be a priority going into 2022.

On 7 Dec 2021 the PBoC (People’s Bank of China) lowered the re-lending rate for ag firms and SMEs by 0.25 percentage points so the 3-month, 6-month and 1-year rates are 1.70, 1.90, and 2.00 percent respectively. This is the first time this year that the central bank has lowered the interest rates on reloans for ag firms and SMEs. In 2020 the rates were reduced twice.

The move is more evidence that PBoC wants to continue its ‘targeted easing’ strategy. Ag firms and SMEs are still suffering under current economic conditions and need further financial support to develop, explains Wen Bin 温彬 Minsheng Bank chief. Lowering the reloan interest rates will help reduce the cost of funds for them and guide small and medium-sized banks to reduce their interest rates, he adds. With this move coming so shortly after the reserve requirement rate cut on 6 December, the LPR rate will likely decline without the PBoC having to make a direct cut to the MLF (medium-term lending facility), predicts Wang Qing 王青 Oriental Jincheng Securities chief macro analyst. This allows the PBoC to reserve more serious policy moves if the economic slowdown worsens.