Repo Rates, Manufacturing Scenarios During Pandemic in Australia & China

While you sit home scrolling the sudden new releases on Netflix, cognizant of the chirping of birds, taking up trending Instagram challenges to kill time, aware that the AQI of your city has gotten so much better, planning a family meal with everyone home all at once- there is a lot of activity that your government is currently undertaking, and so are the overseas ones.

As the most recent pandemic, the novel coronavirus COVID 19 takes a toll on our lives, the government’s role has become even imperative to facilitate an easy life, globally. After taking the most important step to curb COVID 19- country lockdowns, governments are concentrating on what seem to be the more important affairs of their respective economies- injecting stimulus packages and cutting rates sharply to assist with COVID 19 current impacts and future consequences, altering monetary policies to make businesses suffer less and boosting the financial sector and enhancing fiscal policies.

Let’s deep dive into the repo rate situation in Australia and China and the stance of the manufacturing sector in these countries-

Repo, Reverse Repo & Manufacturing in Australia & China

Repo rate is an important instrument of monetary policy for central banks/ monetary authorities to control any inflationary trends in the economy. When central banks increase the repo rate, short-term borrowing is prone to be less lucrative for banks and eventually shun consumption and money flow.

Similarly, a reverse repo is a process through which central banks buy securities from commercial banks via bidding and agree to sell them back in the future.

China’s Story- Lower Rates, More Cash in Financial System, Production Resumes

Recently, China’s central bank, the People’s Bank of China, lowered short-term funding rates and injected cash into its financial system by launching RMB300 billion worth of special central bank lending, RMB500 billion quotas of central bank lending, central bank discounts to render support for epidemic containment and the renewal of work and manufacture.

The country, which is COVID 19’s epicenter, also cut its Reverse Repo Rate by 20 basis points (2.20% from 2.40%), with the intent to facilitate more lending. This move, the largest in almost five years, comes in the time when China’s manufacturing sector is reportedly back in the game, with over 90% of the major industrial firms having restarted work, as the virus abates the nation after it suffered hundreds of billions of dollars of losses over the two-month crisis period.

A low reverse repo rate can possibly help lower lending costs for the real economy. China also has always intended to attract more foreign investments. It should also be noted that China is believed to keep a normal monetary policy in its economy and is able to enhance counter-cyclical adjustments with regular operations.

Australia’s Story- RBA Pumps billions, AUD Advances, Reduced Rates

With over 4.5k confirmed COVID 19 cases in the country, Australia has promptly adhered to measures that will help contain the virus from further wreaking any havoc into its economy. Some of them are listed below-

Recently, a job-support program was announced wherein the Morrison Government will offer a historic wage subsidy to approximately 6 million workers who are bound to obtain a flat payment (before tax) of $1,500 every 2 weeks, via their employer. This means a wage subsidy worth an unprecedented $130 billion.

The Government had previously announced packages worth $17.6 billion and $189 billion (including the $66.1 billion unveiled by the PM later).

Its central bank, the Reserve Bank of Australia (RBA) has agreed to comprehensive package to support the economy by lowering the cash rate target to 0.25%, which will not be lifted until progress is being made towards full employment and inflation is within the 2-3% band (currently, the CPI is 1.8%).

The target for the yield on three- year Government of Australia bonds is kept about 0.25%. The RBA will provide a 3-year funding facility (a minimum of $90 billion) to ADIs at a fixed rate of 0.25 percent.

Moreover, the Bank announced that it will persist to offer liquidity to Australian financial markets by holding 1-month and 3-month repo operations. Also, longer period repo operations of 6-month maturity or extended at least weekly will also be launched, as long as market conditions permit.

Exchange settlement balances at the Bank will be remunerated at 10 basis points, rather than zero, to mitigate the cost to the banking system pertaining to increase in banks' settlement balances

Interestingly, amid the market mayhem, the AUD has come out as one of the better performing currencies, advancing against the majority of the world's largest currencies at the back of government support, robust iron ore shipments, China’s new stimulus measures and recent less cases of the virus in Australia.

Bottomline- The China-Australia Relationship

In closing, we wish to throw some light on the relationship that the two discussed economies share with one another. In a nutshell, the bilateral relationship between them is based on robust trade and economic complementarities, a broad program of high-level visits and extensive collaboration.

Sino-Australian relations are quite interdependent- with China being Australia’s largest trading affiliate, while Australia enacting the role of a prominent source of resources for China. The Australian exports have expanded well beyond the resource sector, with agricultural exports stealing some show too.

However, one should remember that Australia's alliance with the US means that its relations with China are bound to be impacted by the US-China relationship, and the trade war has not yet settled. Experts even opine that with COVID 19 cases being the highest in the US (over 164k), it looks weakened as a global leader currently.

Also, in a post-COVID world, if at all there is patter that shows that Chinese demand is falling while the Australian desire to diversify stays intact, the economic relationship for the nations will be an interesting evolvement.

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