China’s central bank increased its liquidity support for the banking system by rolling over medium-term loans, but kept interest rates unchanged as planned.
The People’s Bank of China (PBOC) is walking a tightrope between maintaining ample liquidity to help a troubled economy and stabilizing the yuan amid expectations of “higher for longer” US interest rates.
The PBOC said in a statement that it conducted medium-term loan facility (MLF) operations of 789 billion yuan ($107.96 billion) to maintain sufficient liquidity in the banking system. . It maintained the one-year borrowing rate at 2.50%, unchanged from the previous operation.
With 500 billion yuan of MLF loans maturing, the PBOC is injecting new liquidity into the banking system. Market observers polled by Reuters last week predicted no change in the MLF rate.
Monday’s trade shows that “the PBOC hopes to provide liquidity to ease market tensions,” said Stone Zhou, director of global markets at UOB China.
This month, a number of Chinese local governments, including Liaoning and Chongqing, are rushing to issue special refinancing bonds to pay outstanding debts, as Beijing steps up efforts to reduce growing debt risks that remain a source of concern for investors.
Analysts expect such bond issuance to reach at least 1 trillion yuan this year.
Additionally, tax collections by the government in October are also expected to cause liquidity strains, analysts say.
The PBOC has cut the MLF rate – a guide to China’s benchmark lending rates – twice this year to reduce borrowing costs in an economy suffering from weak consumption and a worsening housing crisis. But further monetary policy easing could widen the interest rate gap between China and the US and put further downward pressure on the yuan, which has lost about 5.5% against the dollar since the start of the year.
Xing Zhaopeng, senior China strategist at ANZ, said the PBOC’s decision on Monday cannot rule out a five basis point cut in the benchmark one-year lending rate on Friday.
“We expect the PBOC to maintain its easing pace of one measure per month.”
($1 = 7.3085 Chinese Yuan Renminbi)