Paramilitary police officers stand guard outside the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China, September 30, 2022. Portal/Tingshu Wang/File Photo ACQUIRE LICENSE RIGHTS
SHANGHAI, Oct 16 (Portal) – China’s central bank increased liquidity support for the banking system as it extended medium-term policy loans on Monday but left the interest rate unchanged amid concerns about the risk of a sharper yuan decline.
The People’s Bank of China (PBOC) is walking a fine line between maintaining sufficient liquidity to support a struggling economy and stabilizing the yuan amid expectations of “higher longer-term” U.S. interest rates.
The PBOC said in a statement that it implemented medium-term credit facilities (MLF) worth 789 billion yuan ($107.96 billion) to maintain sufficient liquidity in the banking system.
As 500 billion yuan worth of MLF loans mature, the PBOC is pumping 289 billion yuan of fresh liquidity into the banking system, the largest net injection of its kind in nearly three years.
Meanwhile, it left the interest rate on one-year policy loans unchanged at 2.50%, in line with a Portal poll last week.
Monday’s trades show that “the PBOC wants to provide liquidity to ease market stress,” said Stone Zhou, director of global markets at UOB China.
This month, scores of Chinese local governments, including Liaoning and Chongqing, are rushing to issue special refinancing bonds to repay outstanding debt, as Beijing steps up efforts to reduce growing debt risks that continue to worry investors.
Analysts expect issuance of such bonds to reach at least 1 trillion yuan this year.
Additionally, the government’s tax collections in October are also likely to lead to liquidity constraints, analysts said.
The PBOC has cut the MLF interest rate – a guide to China’s benchmark lending rates – twice this year to reduce borrowing costs in an economy hit by weak consumption and a deepening housing crisis.
But further monetary easing could widen the yield gap between China and the United States and put renewed pressure on the yuan, which has lost about 5.5% against the dollar this year.
Xing Zhaopeng, senior China strategist at ANZ, said the PBOC’s decision on Monday not to cut rates does not rule out a five basis point cut in the benchmark one-year lending rate on Friday.
“We believe the PBOC will maintain its easing pace at one measure per month.”
Louise Loo, senior economist at Oxford Economics, also expects China’s monetary policy to remain loose in the short term.
The economic consultancy forecasts that the PBOC will implement another round of interest rate cuts of 10 basis points in the fourth quarter and another 25 basis point cut in the reserve requirement ratio in December.
($1 = 7.3085 Chinese Yuan)
Reporting by Shanghai Newsroom; Edited by Christian Schmollinger, Shri Navaratnam and Sam Holmes
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