China c.bank rolls over political loans to maintain liquidity, keeps rate unchanged

SHANGHAI, Oct 17 (Reuters) – China’s central bank rolled over maturing medium-term political bonds on Monday while keeping the interest rate unchanged for a second month, bolstering expectations that conditions will remain loose to help the economy. economy affected by the pandemic.

The People’s Bank of China (PBOC) kept the rate of 500 billion yuan ($69.6 billion) of one-year medium-term loans (MLF) to certain financial institutions at 2.75%, unchanged from to the previous operation.

Monday’s liquidity injection was aimed at “maintaining reasonably adequate banking system liquidity” and “fully meeting demand from financial institutions,” the PBOC said in an online statement.

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With the same amount of these loans maturing on Monday, the operation resulted in no injection or withdrawal of medium-term liquidity on a net basis from the banking system.

Previously, the PBOC drained 200 billion yuan net each in August and September.

In a poll last week of 27 market watchers, not all respondents expected any change in the MLF rate, with the vast majority expecting a partial rollover.

“Monday’s full turnover is a signal that the Chinese central bank will continue to maintain an easy monetary policy,” said Marco Sun, chief financial market analyst at MUFG Bank (China), noting that the economy has faced relatively huge challenges this year.

China’s third-quarter GDP, due on Tuesday, is expected to highlight the growing challenges it faces amid weak domestic demand and slowing global growth, according to a Reuters poll.

But strong August lending data has reduced the urgency of an interest rate cut, analysts and traders said, while a weaker currency limits the PBOC’s leeway to maneuver its monetary policy, with China a major outlier in a global round of policy tightening to tame runaway inflation.

Widening policy divergence could lead to yuan depreciation and capital outflows, although inflationary pressures in China remain largely benign by global standards.

Still, some market watchers see a chance that the PBOC will reduce the amount of cash banks must set aside as reserves later this year to counter the higher MLF maturity, which totaled 1.5 trillion yuan in November. and December.

“We expect further monetary easing to continue, although the PBOC will be mindful of capital inflow pressure from divergent monetary policies with the U.S. Fed,” said Erin Xin, Greater China Economist at China. HSBC, in a note.

“So further easing is more likely to come in the form of additional liquidity support and targeted easing.”

Xin expects a 25 basis point cut in banks’ reserve requirement ratio (RRR) in the fourth quarter and a further 50 basis point cut in the first quarter of next year.

The MLF rate serves as a guide to the Prime Lending Rate (LPR), which is scheduled for release on Thursday.

Some traders said the one-year LPR should remain unchanged after the stable MLF rate, but the five-year duration could be lowered after a series of measures in recent weeks to support the struggling property market.

The PBOC surprised markets in August by cutting both rates by 10 basis points to revive credit demand and support an economy hit by COVID-19 shocks.

($1 = 7.1895 Chinese Yuan)

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Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill and Jacqueline Wong

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