CHINA’S central bank extended a key policy loan at the same borrowing cost, signalling an intention to aid a nascent economic recovery without adding pressure on the yuan.
The People’s Bank of China (PBOC) offered 125 billion yuan (S$24 billion) via its medium-term lending facility (MLF) on Wednesday (May 15), matching the amount of such loans maturing this month. The central bank also kept the rate on the one-year policy tool steady at 2.5 per cent, in line with estimates in a Bloomberg survey.
“As liquidity is overall stable and given the upcoming ultra-long special government bond issuance, the central bank rolled over the loans,” according to Ming Ming, chief economist at Citic Securities. “The policy rate is kept unchanged given that economic data has stabilised and the yuan is still under pressure.”
The loan rollover came after a broad measure of credit shrank for the first time last month, highlighting Beijing’s challenges to revive investment and consumption. The decision to maintain the MLF rate also shows concerns that fresh monetary easing may further weaken the yuan and exacerbate capital flight, given an already-wide US-China yield gap.
The Chinese currency has dropped around 2 per cent against the US dollar in the onshore market so far this year.
The PBOC’s caution is a sign that Chinese leaders are leaning more on fiscal stimulus to achieve their ambitious growth goal of around 5 per cent for this year. The MLF decision came two days before the Ministry of Finance is scheduled to issue the first batch of one trillion yuan of ultra-long special sovereign bonds, only the fourth of their kind in 26 years.
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The central bank’s composure also reflects the ample liquidity in China’s financial system, where cheaper funding among commercial lenders themselves also reduces the appeal of MLF loans. The interest rate on one-year AAA-rated negotiable certificates of deposits, a popular debt instrument, is now less than 2.1 per cent and below the MLF rate.
Some economists expressed disappointment at the PBOC’s decision to stand pat on the MLF borrowing cost.
“I still expect them to cut interest rates in coming months,” said Zhang Zhiwei, chief economist of Pinpoint Asset Management. “China can’t only rely on exports to support its economy. We need to do more to boost domestic demand.” BLOOMBERG
