China’s central bank, the People’s Bank of China (PBOC), has increased liquidity support to the banking system by rolling over medium-term policy loans. However, the bank kept the interest rate unchanged amid concerns about the risk of further declines in the yuan.
The PBOC conducted medium-term lending facility (MLF) operations worth 789 billion yuan ($107.96 billion) to ensure adequate liquidity in the banking system. With 500 billion yuan worth of MLF loans maturing, the PBOC injected 289 billion yuan of fresh liquidity into the banking system, marking the largest net injection in nearly three years.
The decision to maintain the one-year policy loan rate at 2.50% aligns with expectations from a Reuters poll conducted last week. According to Stone Zhou, director of Global Markets at UOB China, the PBOC’s operations on Monday indicate its aim to provide liquidity and ease stress in the market.
Chinese local governments, such as Liaoning and Chongqing, are rushing to issue special refinancing bonds in an effort to repay outstanding liabilities and reduce growing debt risks. Analysts anticipate issuance of such bonds to reach at least 1 trillion yuan this year.
Furthermore, analysts believe that tax collections by the government in October could also cause liquidity stress. As a result, the PBOC has cut the MLF rate twice this year to lower borrowing costs in an economy impacted by weak consumption and a deepening property crisis.
However, further monetary easing measures could widen the yield gap between China and the United States, which could put additional downward pressure on the yuan. The yuan has already lost roughly 5.5% against the dollar this year.
Xing Zhaopeng, senior China strategist at ANZ, noted that the PBOC’s decision on Monday to not cut rates does not rule out the possibility of a five basis point cut to the one-year lending benchmark rate on Friday. ANZ believes that the PBOC will maintain its current easing pace of one measure per month.
Louise Loo, lead economist at Oxford Economics, expects China’s monetary policy to remain dovish in the near-term. The economic advisory firm forecasts a further round of 10 basis point rate cuts in the fourth quarter, as well as another 25 basis point cut to the reserve requirement ratio in December.
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