July 12 2024: China’s central bank is widely expected to maintain the medium-term interest rate unchanged and withdraw some liquidity from the banking system during the rollover of maturing loans on Monday, according to a Reuters survey.
Despite the sputtering economy, a weak Chinese currency has remained a key constraint on Beijing’s monetary easing efforts, as further easing could widen the yield gap with other major economies, particularly the United States, and trigger more capital outflows.
In a Reuters poll of 35 market watchers conducted this week, 34 (97%) of respondents anticipated that the People’s Bank of China (PBOC) would keep the interest rate on the one-year medium-term lending facility (MLF) loan unchanged at 2.50% from the previous operation. Only one outlier projected a marginal rate reduction.
Market participants believe the significance of the MLF rate will gradually diminish as the PBOC aims to improve the effectiveness of its interest rate corridor. The PBOC introduced a new cash management mechanism this week, and Governor Pan Gongsheng recently stated that the seven-day reverse repo rate “basically fulfills the function” of the main policy rate.
“The importance of the MLF rate may decline, with the PBOC more focusing on buying or selling Chinese government bonds (CGB) around the reverse repo rate in the short term,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
The new liquidity mechanism should allow the seven-day reverse repo rate to move first, followed by other rates, including the MLF rate, according to a bond fund manager.
A significant majority of 28 participants (80%) in the poll predicted that the central bank would only conduct a partial rollover, compared to 103 billion yuan ($14.18 billion) worth of MLF loans due this month.
“Investors contemplate whether the PBOC will only partially roll over MLF in the months ahead to gradually reduce the outstanding amount of the facility,” said Frances Cheung, rates strategist at OCBC Bank.
Some bond traders noted that demand for MLF loans was hampered by signs of loosening cash conditions in the banking system. The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, remained well below the MLF rate, last trading at 1.9642%.
In addition to the PBOC’s efforts to revamp its monetary policy transmission channel, it has issued warnings and introduced several measures, including plans to sell treasury bonds, to cool a long-running bond rally.
“The PBOC may reduce the need to frequently adjust various monetary policy tools, such as the one-year MLF, one-year and five-year loan prime rate (LPR), seven-day reverse repo, and reserve requirement ratio (RRR), which might ease upward pressure on the dollar-yuan pair,” analysts at Societe Generale said in a note.
The monthly fixing of the LPR is due on July 22.
($1 = 7.2636 Chinese yuan)
