- Authority offered more policy loans versus maturities in May
- Liquidity operation sends a supportive policy signal: OCBC
According to Bloomberg article published on May 15, 2023, China’s central bank injected more long-term liquidity into the financial system for the sixth month in a bid to bolster economic growth after multiple indicators revealed faltering recovery momentum.
The People’s Bank of China offered 125 billion yuan ($18 billion) of medium-term lending facility, 25 billion yuan more than the amount maturing in May. Eight of 10 analysts surveyed by Bloomberg prior to the operation expected a flat rollover. The rate on the one-year policy loans was kept at 2.75%, unchanged for a ninth month.
China reported softer-than-expected inflation as well as plunging imports and credit in April, increasing expectations that the PBOC may have room to step up monetary backing. Bonds have rallied on expectations of more policy support, with some analysts saying interest-rate cuts are still possible this year and may come as soon as this quarter.
“The possibility of further lowering the policy rate cannot be ruled out in the future,” and a reduction could come in the third or fourth quarter, said Zhou Guannan, an analyst from Huachuang Securities Co. The PBOC also needs to inject liquidity to avoid possible volatility during the mid-month tax payment period, she said.
Others say that a rate reduction may come during the current April-June period to take quick action in the face of growth headwinds.
Citigroup Inc. analysts wrote in a report last week that they expect a 20 basis-point cut in the MLF rate this year with the first reduction possible as soon as late this quarter. Zhou Hao, chief economist at Guotai Junan International Holdings Ltd., said last week that a rate cut “looks imminent in the second quarter” on signs of a significant growth slowdown.
Central bank data on May 11 showed credit and new loans were much worse than expected in April as consumers and businesses curbed their borrowing. China’s consumer prices also barely rose in April, indicating that the economy’s recovery is waning.
What Bloomberg Economics Says
The People’s Bank of China showed patience by holding its one-year policy rate steady, but it clearly wants to keep more room for action later this year, if needed. Inaction risks undermining confidence that is already soft – and hurting the recovery, in our view. We still think the PBOC will cut the rate by 20 bps before the end of 2023 and expect the first 10-bp cut in June.David Qu, China economist
Interbank rates measuring commercial lenders’ borrowing costs have tumbled to levels that make the more expensive MLF funds less attractive.
Other market rates appear to be reflecting flagging confidence that the economic recovery will stay robust. Yields on 10-year government bonds dipped to their lowest level since November last week as money flooded into safer assets and some lenders cut deposit rates. The yield edged up 1 basis point to 2.71% after the operation, while offshore yuan was little changed at 6.9730 per dollar.
China’s benchmark CSI 300 Index has declined more than 6% from this year’s high in January, while the Shanghai Composite faltered this month, after getting near to entering a technical bull market.
Chinese stocks traded slightly lower Monday after the PBOC’s liquidity injection, while money market rates broadly stable. Overnight repo rates, which have risen from early-May lows and the seven-day rate are little changed as liquidity stress in the market has eased since the required reserve ratio was last cut in March.
“The net liquidity injection is small if not negligible, but it sends a signal to the market that the PBOC stays supportive via quantitative tools,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. in Singapore.
