CHINA refrained from cutting the interest rate and drained the most cash since 2014 with a one-year policy tool, keeping its powder dry ahead of possible escalation in trade tensions with the US next year.
The People’s Bank of China (PBOC) held the interest rate on the one-year medium-term lending facility (MLF) steady at 2 per cent – a move predicted by nine of out 10 economists surveyed by Bloomberg. The authorities also withdrew a net 1.2 trillion yuan (S$223 billion) from the financial system with the tool, the most since 2014.
Earlier this month, policymakers pledged “moderately loose” monetary policy – the first shift in stance in about 14 years – along with “more proactive” fiscal tools to bolster the economy. But so far, they have refrained from announcing any concrete stimulus, reflecting their patience before the US imposes the tariffs that president-elect Donald Trump threatened earlier.
“The steady MLF rate is within expectation and we hold on to forecast for cuts by 40 to 50 basis points in 2025,” said Ming Ming, chief economist at Citic Securities. The liquidity withdrawal also raises the chance of a cut to banks’ reserve-requirement ratio, likely as soon as by year-end, he added.
The PBOC in recent months has downplayed the role of the MLF as the main policy rate, shifting instead to the seven-day reverse repo rate to guide market borrowing costs. The seven-day rate has stayed unchanged since a 20-basis point cut in late September.
On Wednesday (Dec 25), the central bank offered 300 billion yuan of policy loans via MLF, versus with the maturities of 1.45 trillion yuan in December. It would be the fifth month in a row that the PBOC withdrew cash with the tool on a net basis.
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The cash shortfall could be offset by other tools the PBOC wields to maintain liquidity. Last month, it injected a net one trillion yuan of funds through the so-called outright reverse repurchase agreements and purchased government bonds.
The PBOC reduced the injection of policy loans via MLF as there’s ample liquidity in the market, Financial News, a newspaper backed by the central bank, said in a report after the operation. The PBOC has also created multiple other tools to smooth out volatility in the event of large maturities in the MLF, according to the report.
Looking ahead, the market expects China to deliver sizeable rate reductions next year. Such bets have sent the benchmark sovereign bond yields to record lows this month.
The yield on China’s 10-year government bonds fell one basis point to 1.73 per cent, close to a record low. BLOOMBERG
