China Central Bank Seen Boosting Liquidity, Keeping Rates Steady

With a string of data showing China’s economy may be stabilizing, a survey of market watchers has forecast that the People’s Bank of China will boost liquidity this week, but keep medium-term loan rates steady.

China’s central bank is seen keeping borrowing costs steady when it rolls over its medium-term policy loans on Friday.

Policy makers have already lowered the medium-term policy rate twice since June to stimulate credit demand and support a faltering economic recovery.

But the monetary easing measures have widened the yield differentials with other major economies, particularly the United States, and have dented the yuan currency.

ALSO SEE: China Slams EU’s Car Probe as a ‘Naked Protectionist Act’

Bank lending jumps in August, but property support needed

All 33 market watchers polled this week predicted that the PBOC would leave the interest rate on its one-year medium-term lending facility (MLF) loans unchanged when it is due to roll over 400 billion yuan (close to $55 billion) worth of these maturing loans this month.

Among them, 27, or 82% of respondents, forecast fund offerings would exceed maturity.

“Mild liquidity withdrawal or injection via MLF may not be of substance compared to the support measures announced so far; still, we would put the potential MLF amount at 400-420 billion yuan,” Frances Cheung, a rates strategist at OCBC Bank, said.

New bank lending in China beat expectations by nearly quadrupling in August from July’s level, as the central bank sought to shore up economic growth amid soft demand at home and abroad.

While recent data showed signs of stabilisation in an economy that has rapidly lost steam since the second quarter, analysts said more policy support is needed, particularly for the ailing property sector, to foster a durable recovery in growth.

Large rate cuts ‘unlikely’

To revive broad credit demand and rescue the troubled property sector, China unexpectedly cut the MLF rate last month.

“The PBOC’s decision to cut policy rates last month even as the renminbi approached a multi-year low against the US dollar hinted at a slightly greater tolerance for currency weakness,” Julian Evans-Pritchard, head of China economics at Capital Economics, said in a note.

“But the significant step-up in FX intervention since then makes it clear that this tolerance is still limited. For this reason alone, it seems unlikely that the PBOC will embrace large-scale rate cuts.”

China’s yuan has lost more than 5% of its value against the dollar so far this year to become one of Asia’s worst performing currencies for 2023, prompting the authorities to step up efforts to slow the pace of declines.