PBOC maintains liquidity status quo with policy loan rollover

(Bloomberg) – China added enough medium-term funds to the financial system to keep liquidity at existing levels as policymakers sought to balance supporting the economy without fueling asset bubbles .

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The People’s Bank of China injected 500 billion yuan ($ 77.6 billion) through its medium-term loan facility, corresponding to the 500 billion yuan maturing on Friday. The result was in line with forecasts by five of the eight analysts polled by Bloomberg News. The MLF rate was left at 2.95%.

The PBOC move comes as mounting price pressures raise uncertainty over the need for further monetary easing, as concerns grow about possible contagion from the China Evergrande group debt crisis. Financial regulators asked some major banks at the end of last month to speed up mortgage approval in the last quarter, according to people with knowledge of the matter.

“It always feels like a half full glass, half empty glass story,” said Tommy Xie, Greater China research manager at Oversea-Chinese Banking Corp. in Singapore. “The key conflict in the market right now is the growing hope for further easing due to the growing conviction of slower growth compared to more patient policymakers in cross-cyclical politics. “

Xie still sees the possibility for the PBOC to reduce the reserve requirement ratio by 50 basis points this year. The PBOC’s easing hopes are also being held up with policy loan maturities of around two trillion yuan for the remainder of 2021.

Hao Zhou, senior economist at Commerzbank AG in Singapore, said the central bank may cut the prime rate on one-year loans this month to help lower funding costs in the real economy. The rate, which is determined by a group of banks, is considered China’s de facto benchmark rate for new loans. It has been stable for 18 consecutive months and is expected to be released on October 20.

“The chances of another RRR reduction in 2021 are low,” Zhou said.

PBOC Governor Yi Gang told the Group of 20 central bankers meeting on Wednesday that China’s prudent monetary policy will be “flexible, targeted, reasonable and appropriate” to support a high quality economic development. He added that the country’s inflation is “moderate” overall.

Chinese 10-year yields stabilized after rising nearly two basis points to 2.97% earlier. 10-year bond futures fell to their lowest since early July. The central bank also added 10 billion yuan through seven-day reverse repurchase agreements in its open market operations, corresponding to the amount coming due.

(Updates with the graph and the economist’s commentary in the sixth paragraph.)

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