China's central bank kept short-term borrowing costs steady on Wednesday, despite a new round of global easing following the U.S. Federal Reserve's 25 bps rate cut earlier Tuesday to stem the economic fallout from the coronavirus.

The stance of China's central bank may seem strange on the surface to the outside world, especially as the country's economy is being hit by the coronavirus outbreak. The Chinese government is taking strict measures to contain the contagion, such as locking down all of Hubei Province, where Wuhan, the epicenter of the outbreak is located. This has delayed the work resumption date nationwide as the government has ordered its citizens to stay at home, which along with other various factors, resulted in its manufacturing PMI dropping to a 16-year low in February.

However, experts argue that the decision of China's central bank is on solid ground, since China and the U.S. are in different stages in the fight against the coronavirus outbreak, so the need is different.

The virus first emerged in China, and the U.S. is at the beginning stage of its outbreak, according to current findings, so China's central bank had already taken many easing measures way before the Fed.

Right after the Spring Festival break, China lowered the open market operations rate, and then lowered loan prime rate (LPR). 

"We can say China's central bank actually led the trend of monetary easing, so there is no need for China to echo the Fed's move," said Lu Zhengwei, chief economist of Industrial and Commercial Bank of China.

"Since the U.S. couldn't limit its citizens' movement, and is unwilling to sacrifice its real economy to curb the spread of the virus, its only option is to ease the monetary policy," said Zhang Anyuan, the chief economist of China Securities.

Besides, the relatively higher interest rate compared to Western economies will help stabilize the Chinese yuan's exchange rate, said Lu. At the same time, Lu cautioned that we need to closely watch if the exchange rate is overrated.

Predictions for China's next stimulus policy

Lu believes that further rate cuts in China are necessary, and will probably happen in Q2.

"If the government wants the commercial banks to issue more long-term loans and buy up more long-term bonds, then the central bank has to further cut rates, so the commercial banks can, in line with liquidity regulatory requirement," Lu said.

Zhang agreed with Lu, saying: "Easing is the basic feature of this year's monetary policy." 

There are different ways to inject more liquidity in the market, such as lowering reserve requirement ratio (RRR), LPR or even benchmark deposit rate. However, Zhang cautioned that China should use monetary policies in moderation.

"After this big epidemic, China and its people need rehabilitation, [and so it] shouldn't launch too many large-scale policy stimulus [packages]," Zhang said.

Zhang suggested the government adopt a combination of fiscal and monetary policy to weather through the disaster, with emphasis on fiscal policies.

He specifically proposed one relief measure: The central treasury issues a "special national debt for after-epidemic recovery" to commercial banks, and the banks can use this bond for required reserve payments.

"This measure could solve the problem of massive liquidities sitting up in the banking system after RRR cuts," Zhang said.

Zhang added that the current fiscal policies are limited in disaster relief, so more economy reestablishing measures will be unveiled during the Two Sessions, which were postponed earlier this year.

The aftermath of U.S.' rate cuts

However, the Fed's attempt to calm financial markets by cutting rates did not play out as U.S. stock indexes closed down about three percent, safe-haven gold rose three percent and analysts and investors questioned whether the rate cut will be enough if the virus continues to spread.

Jerome Powell, the Fed's head, admitted that the boost from the rate cut is limited, he said that "rate cut cannot reduce infection, it won't fix a broken supply chain… we don't think we have all the answers."

"At this special time, the rate cut will cause market's suspicion, so it's normal the market dropped. Previous emergency rate cut also caused similar effects," Zhang commented.

The Fed's rate cuts will push the major economies into another round of competitive monetary easing, said Lu Zhengwei when speaking of the global impact of the U.S.' monetary policy.

"Countries around the world are forced to further lower their rate, if not their currency will be under pressure for appreciation," said Lu. "The global economy is already sluggish, so they are even under more pressure of continuing to cut rates."

The financial market may continue to uptick after the panic stage, Lu said. Yet he also warned that it poses risks in the long run, since financial markets in developed economies have been seeing an upward trend for a long time now.