On Friday, the Chinese central bank withdrew funds from a medium-term policy loan operation. Additionally, they maintained a key policy rate, demonstrating their sustained emphasis on maintaining currency stability. This action comes amidst uncertainties surrounding the timing of anticipated interest rate decreases by the Federal Reserve.
In recent years, the dollar has strengthened, while the yuan has faced pressure due to the Federal Reserve’s extensive monetary tightening. Ahead of a major move by the Fed or other central banks, reducing rates would increase yield discrepancies. This could further weaken the value of the local currency.
The People’s Bank of China (PBOC) has announced that it will maintain the interest rate for a one-year medium-term lending facility (MLF) at 2.50%. This decision aligns with the previous operation, totaling 387 billion yuan ($53.80 billion).
The action resulted in a net withdrawal of 94 billion yuan from the banking system of MLF loans. These loans, valued at 481 billion yuan, are scheduled to expire this month. Since November 2022, it was the first cash withdrawal made via the liquidity tool.
In an online statement, the central bank claimed that the loan operation on Friday “fully met financial institutions’ demand.” This was done to maintain relatively enough liquidity in the banking system.
Xing Zhaopeng, senior China analyst at ANZ, states that “net cash withdrawal is an obvious signal.” This echoes the content of the government work report on preventing idling of funds.
“Given major commercial banks have not yet lowered deposit rates again, chances of another policy rate cut are low.”
Thirty-two out of the 36 market observers surveyed by Reuters predicted that the central bank would not alter the borrowing cost of the one-year MLF loans. As a result, 89% of them anticipated this decision.
China has set a lofty goal of achieving 5% economic growth by 2024. To reach this target, the nation is taking actions to transform its development model and mitigate risks, particularly those stemming from insolvent real estate developers and indebted cities.
Last week, PBOC Governor Pan Gongsheng issued a dovish statement to the market. He stated that the bank would keep the yuan essentially stable and emphasized that China possesses “rich monetary policy tools.”
Since then, investors have increased their wagers, anticipating that the authorities will implement other monetary easing policies. This includes a significant drop in bank reserves to sustain the second-largest economy in the world.
A reserve requirement ratio (RRR) drop “may suggest that an MLF operation is forthcoming,” according to Frances Cheung, an OCBC Bank rates strategist.
It is possible that some of the MLF will be replaced by liquidity obtained via an RRR cut. After all, officials have made overt allusions to a reduction in the RRR.”
According to a statement, the central bank also injected 13 billion yuan through seven-day reverse repos. Additionally, it kept the borrowing fee at 1.80%.
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