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Chinese authorities stunned investors again this week by launching an unannounced loan operation at significantly reduced rates on Thursday, signaling they are aiming to boost the economy with more monetary support.
The central bank slashed key benchmark lending rates on Monday, days after a top leadership conference that outlined other big adjustments.
In a statement, the People’s Bank of China (PBOC) granted 200 billion yuan ($27.5 billion) in one-year MLF loans at 2.30%, down 20 basis points from its previous loan.
The central bank also injected 235.1 billion yuan into markets through seven-day reverse repos at 1.70% to “maintain reasonably ample month-end banking system liquidity conditions,” the statement stated.
“Basically a reaction to the sharp declines in the stock market,” said ANZ senior China strategist Xing Zhaopeng of the MLF rate drop. This week, China’s benchmark indexes fell.
On Thursday, China’s stock markets responded badly to the news, interpreting the unexpected haste of authorities to lend as higher deflationary pressures and consumer demand weakness than priced into assets. This month, China’s GDP was worse than projected.
Losses this month reached 5% as the Hang Seng China Enterprises index in Hong Kong, declined 1.6%. After the MLF operation and rate drop, sovereign bond yields declined.
MUFG Bank’s (China) chief financial market analyst, Marco Sun, said the policy rate drop might lower financing costs and unleash cash. He further attributed the unexpected MLF operation to a substantial MLF loan due.
Monthly MLF loan operations occur mid-month. The PBOC removed 3 billion yuan last week while maintaining the interest rate.
Over 7 trillion yuan in MLF loans are due to mature this year, including 4.68 trillion. The PBOC may replace it with a permanent cash infusion by lowering banks’ reserve requirements due to the large number of maturing loans.
will replace MLF loans, ANZ’s Xing expects the central bank will lower RRR in the fourth quarter.
Market watchers said Thursday’s rate decrease was a response to big lenders’ deposit rate cuts.
The Industrial and Commercial Bank of China (ICBC) AgBank China Construction Bank Bank of China and Bank of Communications cut deposit rates by 5 to 20 basis points (bps), according to their websites.
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