The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China, September 28, 2018. Portal/Jason Lee
SHANGHAI, Aug 15 (Portal) – China’s central bank unexpectedly cut a key interest rate for the second time this year and withdrew some cash from the banking system on Monday to try to revive credit demand to support the COVID-hit economy.
Economists and analysts said they believe Chinese authorities are keen to prop up the sluggish economy by allowing increasing policy divergence with other major economies aggressively raising interest rates.
The People’s Bank of China (PBOC) said it cut the rate on its 400 billion yuan ($59.33 billion) one-year medium-term lending facility (MLF) to some financial institutions by 10 basis points (bps) to 2.75% . from 2.85%.
In a poll of 32 market watchers last week, all respondents had predicted the MLF rate would remain unchanged and 29 had predicted a partial rollover. Continue reading
“The rate cut surprises us,” said Xing Zhaopeng, senior China strategist at ANZ.
“It should be a reaction to Friday’s weak credit data. The government remains cautious on growth and will not ease up.”
Bank lending in China fell more-than-expected in July, while overall credit growth slowed as renewed COVID flares, job worries and a deepening housing crisis deterred businesses and consumers from taking on more debt. Continue reading
The PBOC justified its move with “keeping the liquidity of the banking system reasonably sufficient”. And with 600 billion yuan in MLF loans due, the operation resulted in a net withdrawal of 200 billion yuan.
Market participants largely priced in the partial rollover as the banking system was already stocked with cash, interbank money rates fluctuated at two-year lows and were persistently below policy rates.
“In hindsight, today’s 10 basis point cut can be seen as ‘frontloading’ ahead of policy space tightening going forward as the PBOC sees structural inflationary pressures,” said Frances Cheung, rates strategist at OCBC Bank.
The PBOC reiterated in its second-quarter monetary policy report that it would step up implementation of its prudent monetary policy and keep liquidity adequately adequate, while closely monitoring domestic and external inflation changes.
“Despite warnings of inflationary risk and flushing liquidity, prevailing downside risks surrounding COVID spreads and the real estate sector prompted the PBOC to cut rates to stimulate demand,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
China’s 10-year Treasury futures rose more than 0.7% in early trade after the rate decision, while government bond yields for the same maturity fell about 5 basis points.
The central bank also injected 2 billion yuan through seven-day reverse repos, while cutting borrowing costs by the same 10 basis point margin, from 2.1% to 2.0%, according to an online statement.
The PBOC cut both rates by 10 basis points in January.
($1 = 6.7425 Chinese Yuan)
Reporting by Winni Zhou and Brenda Goh; Edited by Kim Coghill and Neil Fullick
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