On Monday, when it renewed medium-term policy loans, China’s central bank increased liquidity assistance to the banking sector while maintaining the interest rate out of worry about the possibility of further strong currency depreciation.
The People’s Bank of China (PBOC) is treading a fine line between maintaining sufficient liquidity to support a faltering economy and stabilizing the yuan amid forecasts of “higher for longer” U.S. interest rates.
To maintain enough liquidity in the banking sector, the PBOC said it had carried out medium-term lending facility (MLF) operations totaling 789 billion yuan ($107.96 billion).
The PBOC is injecting 289 billion yuan of new liquidity into the banking system, the largest such net injection in over three years, due to 500 billion yuan worth of MLF loans coming due.
Meanwhile, it maintained the interest rate on the one-year policy loans at 2.50%, per a Reuters poll conducted last week.
The activities on Monday demonstrate that “the PBOC hopes to provide liquidity to ease stress in the market,” according to Stone Zhou, director of Global Markets at UOB China.
As Beijing intensifies efforts to lower rising debt concerns that continue to scare investors, several Chinese local governments, notably Liaoning and Chongqing, are hurrying to issue special refinancing bonds to cover existing commitments.
Analysts predict that this year will see at least 1 trillion yuan in such bond issuance. Analysts also predicted that the government’s tax receipts in October would likely result in financial issues.
The PBOC has reduced the MLF rate, a benchmark lending rate indicator for China, twice this year to bring down borrowing costs in a struggling economy plagued by poor consumption and a worsening real estate crisis.
The yuan, which has fallen around 5.5% versus the dollar this year, might face more negative pressure if China’s yield gap with the U.S. widens due to further monetary easing.
The PBOC’s decision to leave interest rates unchanged on Monday would not exclude a five basis point reduction in the benchmark rate for 1-year loans on Friday, according to Xing Zhaopeng, senior China analyst at ANZ.
“We believe the PBOC will maintain its easing pace at one measure per month.”
Lead economist at Oxford Economics Louise Loo predicts that China’s monetary policy will continue to be dovish in the foreseeable future.
According to the economic advice firm, the PBOC will implement additional rate cuts of 10 basis points in the fourth quarter and another reduction in the reserve requirement ratio of 25 basis points in December.
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