China intensifies liquidity support for the banking system

SHANGHAI (Reuters) – China’s central bank boosted liquidity support for the banking system with an extension of medium-term policy loans on Monday but kept interest rates unchanged amid concerns about the risk of further sharp declines in the yuan.

The People’s Bank of China (PBOC) is walking a tightrope between maintaining sufficient liquidity to help the struggling economy and stabilizing the yuan amid expectations that US interest rates will rise “for a longer period.”

The People’s Bank of China said in a statement that it had conducted medium-term lending facilities worth 789 billion yuan ($107.96 billion) to maintain sufficient liquidity in the banking system.

With 500 billion yuan in MLF loans due, the People’s Bank of China is pumping 289 billion yuan of new liquidity into the banking system, the largest net injection of its kind in nearly three years.

Meanwhile, the bank kept the interest rate on one-year policy loans unchanged at 2.50%, in line with a Reuters poll last week.

Monday’s operations show that “the People’s Bank of China hopes to provide liquidity to ease market tension,” said Stone Zhu, director of global markets at UOB China.

This month, a slew of Chinese local governments, including Liaoning and Chongqing, are rushing to issue special refinancing bonds to pay off maturing liabilities, as Beijing steps up efforts to curb rising debt risks that remain a concern for investors.

Analysts expect the issuance of such bonds to reach at least 1 trillion yuan this year.

In addition, analysts said that tax collections by the government in October are also likely to cause liquidity pressures.

The People’s Bank of China has cut its multilateral interest rate – a guide to China’s benchmark lending rates – twice this year to lower borrowing costs in an economy suffering from weak consumption and a worsening real estate crisis.

But further monetary easing could lead to a widening of the yield gap between China and the United States, putting new downward pressure on the yuan, which has lost about 5.5% against the dollar this year.

The People’s Bank of China’s decision on Monday not to cut interest rates does not rule out cutting its benchmark one-year lending rate by five basis points on Friday, said Xing Zhaoping, chief China strategist at ANZ Bank.

“We believe the PBOC will maintain the pace of easing at one per month.”

Louise Lu, chief economist at Oxford Economics, expects China’s monetary policy to remain pessimistic in the near term.

The economic consulting firm expects the People’s Bank of China (PBOC) to make another round of interest rate cuts of 10 basis points in the fourth quarter, as well as another 25 basis point cut in the reserve requirement ratio in December.

($1 = 7.3085 Chinese yuan)

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