Sep 25 2024: In line with its broader policy easing measures, China’s central bank, the People’s Bank of China (PBOC), reduced the interest rate on its medium-term loans to banks on Wednesday. This move is part of a larger effort to revitalize a struggling economy.
The PBOC cut the rate on 300 billion yuan ($42.66 billion) worth of one-year Medium-Term Lending Facility (MLF) loans to certain financial institutions from 2.30% to 2.00%. The bid rates in this operation varied between 1.90% and 2.30%, and the total outstanding balance of MLF loans now stands at 6.878 trillion yuan, according to an online statement from the central bank.
Financial News, a PBOC-backed publication, noted that the public disclosure of bid rates for the first time demonstrates differences in mid- and long-term funding needs among financial institutions. This move aligns with the central bank’s promise to improve transparency in its monetary policy.
Unlike open market operations, the results of the MLF auction were released separately. The distinction between the MLF rate and the seven-day reverse repo rate, which now serves as the main policy rate, was emphasized. According to the publication, this move returns MLF to its original role as a tool for providing mid- to long-term liquidity.
A total of 591 billion yuan worth of MLF loans expired this month, coinciding with the PBOC’s partial rollover of funds.
On Tuesday, China introduced its most significant economic stimulus since the COVID-19 pandemic, aimed at steering the economy away from deflation and towards the government’s growth target.
“The partial rollover wasn’t unexpected, especially in light of the planned reserve requirement ratio (RRR) cut,” said Frances Cheung, head of FX and rates strategy at OCBC Bank. Cheung referred to the central bank’s planned 50-basis-point reduction in the amount of cash banks are required to hold as reserves. She also pointed out that the window remains open for another RRR cut by the end of the year, given the significant MLF loan maturities in the fourth quarter.
Cheung further observed that the PBOC’s disclosure of the highest and lowest bids signaled a shift towards making the facility more demand-driven, with a reduced focus on the MLF rate as a guiding policy tool.
Additionally, the PBOC injected another 196.5 billion yuan via 14-day reverse repos, keeping the interest rate steady at 1.85%.
At the time of the announcement, the exchange rate was $1 = 7.0318 Chinese yuan.
