China central bank rolls over policy loans to maintain liquidity, keeps rate unchanged
SHANGHAI -China’s central bank rolled over maturing medium-term policy loans while keeping the interest rate unchanged for a second month on Monday, reinforcing expectations that conditions will continue to stay loose to help the pandemic-hit economy.
The People’s Bank of China (PBOC) kept the rate on 500 billion yuan ($69.6 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions at 2.75 percent, unchanged from the previous operation.
Monday’s liquidity injection was to “keep banking system liquidity reasonably ample” and to “fully meet financial institutional demand,” the PBOC said in an online statement.
With the same amount of such loans maturing on Monday, the operation resulted in no injection or withdrawal of medium-term liquidity on a net basis from the banking system.
Previously, the PBOC drained a net 200 billion yuan each in August and September.
In a poll of 27 market watchers conducted last week, all respondents forecast no change to the MLF rate, with the vast majority of them expecting a partial rollover.
“Monday’s full rollover is a signal that China’s central bank will continue to maintain a loose monetary policy stance,” said Marco Sun, chief financial market analyst at MUFG Bank (China), noting the economy has been facing relatively huge challenges this year.
China’s third quarter GDP, due on Tuesday, is likely to highlight the intensifying challenges it faces amid weak domestic demand and slowing global growth, a Reuters poll showed.
But strong lending data from August has decreased the urgency for an interest rate cut, analysts and traders said, while a weakening currency limits room for the PBOC to maneuver its monetary policy as China has been a major outlier in a global run of policy tightening to tame rampant inflation.
Widening policy divergence could risk yuan depreciation and capital outflows, despite inflationary pressure in China remaining largely benign by global standards.
Still, some market watchers see a chance the PBOC will cut the amount of cash that banks must set aside as reserves later this year to counteract higher MLF maturity, which totalled 1.5 trillion yuan in November and December.
“We expect further monetary easing to continue, though the PBOC will be conscious of outflow pressure from divergent monetary policies with the U.S. Fed,” Erin Xin, economist for Greater China at HSBC, said in a note.
“Thus, additional easing is more likely to come in the form of further liquidity support and targeted easing.”
Xin expects a 25-basis-point cut to banks’ reserve requirement ratio (RRR) in the fourth quarter and an additional 50-bp reduction in the first quarter of next year.
The MLF rate serves as a guide to the loan prime rate (LPR), which is scheduled for release on Thursday.
Some traders said the one-year LPR is likely to stay unchanged following the steady MLF rate, but the five-year tenor could be lowered after a slew of measures in recent weeks to prop up the embattled property market.
The PBOC surprised markets in August by lowering both rates by 10 basis points to revive credit demand and support an economy hurt by COVID-19 shocks.
($1 = 7.1895 Chinese yuan)
