Chinese central bank offers more medium-term loans than expected to cushion economic slowdown

SHANGHAI (Aug. 16): China’s central bank injected billions of yuan in medium-term loans into the financial system on Monday, which many market participants interpreted as an effort to support the economy, although the cost of these loans remained unchanged.

The widening of Delta variant epidemics across the country, torrential rains and flooding, and slowing economic growth suggested by recent data have all required additional easing measures to cushion the slowdown, analysts say. .

The People’s Bank of China (PBOC) has kept the rate on a one-year medium-term loan (MLF) worth 600 billion yuan ($ 92.64 billion) to some financial institutions at 2, 95% compared to previous operations.

The central bank said the loan operation was aimed at “fully meeting the demand for liquidity from financial institutions” while maintaining “reasonably sufficient” fund conditions.

The move “took into account that financial institutions could use some of the funds released from a reduced reserve requirement ratio (RRR) in July to repay MLF loans due this month,” the PBOC added. .

“The amount of the rollover is larger than expected, but the use of cash on the previous RRR reduction to cover the balance is a slight disappointment for the market, as even short-term open market (OMO) operations are not not used, ”said Frances Cheung, rate strategist at OCBC Bank.

“In the future, the PBOC may choose to continue to let banks pass on lower financing costs to their customers rather than making an outright cut in interest rates, and a cut in the reserve rate cannot. therefore not to be ruled out, especially in the context of an MLF maturity profile that is still high in the coming years. four months, even more in November and December. “

Several bond traders also said the size of the MLF loan injection was larger than they expected.

A total of 3.05 trillion yuan in MLF loans is expected to expire in the fourth quarter of this year, according to Reuters calculations based on official data.

In the same statement online, the central bank said Monday’s deal was a 700 billion yuan refinancing of MLF loans maturing on Tuesday.

The PBOC carried out a surprise cut in banks’ RRR in July while highlighting political stability in its second quarter monetary policy report, dampening market expectations for more aggressive monetary easing, including rate cuts. ‘interest.

“As long as the prudent stance of monetary policy remains unchanged, the MLF rate will not be easily adjusted,” said Wang Yifeng, senior analyst at Everbright Securities, adding that a reduced MLF cost could encourage financial institutions to fund loans. leveraged positions.

“We don’t think policymakers already want a significant easing of the overall stance of macro policy,” said Louis Kuijs, head of Asian economics at Oxford Economics.

China is expected to announce its August fixing of the benchmark lending rate (LPR) in August, which is loosely pegged to the MLF rate. ($ 1 = 6.4768 Chinese yuan)

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