China's central bank rolls out policy loans to sustain market liquidity

On Wednesday, the People's Bank of China increased its liquidity injection into the financial system while maintaining the interest rate for maturing medium-term loans.

The loan operation aims to sustain sufficient liquidity in the banking system, countering short-term factors such as tax payments and government bond issuance.

The PBoC announced it would maintain the interest rate at 2.50 percent for 1.45 trillion yuan ($199.92 billion) in one-year medium-term lending facility (MLF) loans to specific financial institutions. This decision aligns with market forecasts and keeps the rate consistent with the previous operation.

As 850 billion yuan ($117.56 billion) worth of MLF loans will mature this month, the central bank's injection of new funds amounted to a net 600 billion yuan ($82.99 billion).

"But MLF loans is rather expensive, and we still expect additional reserve requirement ratio (RRR) cuts in the future to reduce (banks) debt costs."

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Xing Zhaopeng, senior China strategist at ANZ.

The central bank also injected 495 billion yuan ($68.34 billion) in liquidity through seven-day reverse repo agreements while maintaining the borrowing cost at 1.80 percent.

The benchmark interest rate for one-year AAA-rated negotiable certificates of deposit (NCDs), which reflects short-term interbank borrowing costs, has reached a six-month high of 2.5653 percent.

This is approximately seven basis points higher than the 2.50 percent MLF rate charged by the central bank to financial institutions.

Money market rates have increased due to a surge in bond issuance to support government spending and year-end corporate cash needs. A spike in short-term borrowing costs late last month unsettled markets, prompting the PBoC to maintain stable funding costs and support economic recovery.

Market observers say the central bank's ability to reduce interest rates significantly is restricted due to the weakening Chinese yuan. The currency has lost about five percent against the U.S. dollar this year, making it one of the worst-performing Asian currencies.

According to Reuters, China is an anomaly among global central banks as it eases monetary policy to support the country's sluggish recovery. However, further interest rate cuts could widen the yield gap with the U.S., intensifying depreciation pressures on the yuan and potentially triggering capital outflows.

Some traders and analysts say providing liquidity support through medium-term policy loans for the emerging economic recovery has lessened the immediate need for additional monetary stimulus.

Plunging sectors

Although some Chinese sectors, such as industrial output and retail sales, are improving following a mid-year slowdown, others, like the property market and exports, are still on a downward trend.

Property sales by floor area declined 20.33 percent year-on-year in October, further weakening from a 19.77 percent drop in September. For the first ten months of 2023, sales fell 7.8 percent year-on-year.

In October, property investment showed a year-on-year decline of 16.7 percent, following an 18.7 percent decrease in September. New construction starts, measured by floor area, dropped 23.2 percent year-on-year. Additionally, funds raised by China's property developers decreased by 13.8 percent on an annual basis.

The government has been trying to bolster the real estate sector through various initiatives, such as easing home-buying restrictions and cutting borrowing costs. However, this has yet to generate a significant rebound in major cities.

Meanwhile, China's exports fell 6.4 percent year-on-year in October. This exceeds the 6.2 percent decline in September but falls short of the 3.3 percent drop estimated earlier. Imports rose 3.0 percent, defying forecasts for a 4.8 percent contraction and reversing a 6.2 percent fall in September.